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Tencent and Alibaba valuations rocket to new heights

Reaching more of Asia's 3bn people holds key to surpassing Facebook and Google

  © Reuters

GUANGZHOU/SHANGHAI/TOKYO -- Chinese technology groups Tencent Holdings and Alibaba Group Holding have seen their valuations push closer to the rarefied plane occupied by the likes of Facebook and Google parent Alphabet, which they just may topple by winning the battle for emerging Asian markets.

The duo's combined market capitalization has more than doubled since the end of last year to more than $900 billion -- a steeper climb than the 30-60% logged by the U.S. giants that dominate the ranks of the world's most valuable companies. Tencent now sits at seventh place on that list, with Alibaba in eighth. Together, they are worth somewhat more than top-ranked Apple.

A national phenomenon

"WeChat will keep steadily changing how people live," Tencent spokesman Zhang Jun told international media last month in Guangzhou.

The Guangdong Province city was where Tencent, the bigger of the duo by market cap, launched its flagship social media app seven years ago. WeChat was viewed at the time as merely the Chinese equivalent of WhatsApp Messenger or Line but has since become an indispensable part of Chinese life. 

WeChat -- Weixin in China -- serves as a platform for a dizzying array of services, such as bike-sharing, paying utility bills, making medical appointments and sending money between friends. Its user base has grown at an annual 25% clip and is expected to reach 1 billion this year, far outstripping Tokyo-based Line's count. Users send an average of 38 messages through the app daily.

Seeing opportunity in this massive audience, businesses have also flocked to the platform, which now has more than 20 million corporate users. Companies focus more on building mobile-friendly WeChat homepages than on websites designed for personal computers.

Tencent's 3.79 trillion Hong Kong dollar ($485 billion) market capitalization has given the company the wherewithal to pursue a new fundlike business model. It is investing in a broad range of businesses, at a rate of one enterprise every three days on average. It poured $1.77 billion into American electric-car maker Tesla in March and led a $600 million-plus funding round announced in June for Chinese bicycle-sharing company Mobike.

Investments in high-profile companies lift Tencent's own shares even higher, creating a virtuous cycle. A representative from Tencent's investment department said the company has no predetermined plans for future deals. "As long as there are good targets, we'll keep on investing," the representative said.

Battleground markets

Both Tencent and rival Alibaba have their sights set on Asia and its population of well over 3 billion, including 600 million in Southeast Asia and 1.3 billion in India along with China's 1.4 billion people.

Making headway in Asian markets, where American technology companies have less of a presence, means Tencent does not need to make risky charges into the mature European and U.S. markets, with their populations of 500 million and 300 million, a senior executive said.

Alibaba thinks much the same way. The e-commerce giant has focused mainly on China, while has spread into the U.S., Europe, Japan and other developed markets. But the battle for the rest of Asia has yet to be decided. New York-listed Alibaba had a market cap of $449 billion as of Thursday's close.

Alibaba has a head start in Southeast Asia, gaining a foothold through such steps as acquiring Singapore-based e-retailer Lazada. Competition between the American and Chinese titans is heating up, with Amazon opening its first Southeast Asian distribution center in Singapore this summer and Alibaba leading a $1.1 billion investment announced this August in Indonesian e-commerce company Tokopedia. Not to be outdone, Tencent is confident it can take the lead in emerging Asian markets, the aforementioned executive said.

Both Alibaba and Tencent have forward price-earnings ratios around the same level as Facebook and Alphabet. Some analysts argue that the Chinese companies' growth potential justifies their lofty valuations.

Tencent and Alibaba dominate a Chinese market where the government has largely closed off the internet to outside players. Continuing domestic expansion while seizing growth opportunities elsewhere in Asia will be key to surpassing their American counterparts.

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