Tencent’s business model: How Tencent makes money

Founded in 1998, Tencent connects over one billion users through its communications and social platforms, namely Weixin and QQ. Since its founding, Tencent has found new income streams including high-performance advertising, gaming, digital content, and fintech services. As of 23 November 2020, Tencent’s market capitalisation stood at HK$5.6 trillion.

In this article, I’ll summarise Tencent’s business segments, financial performance, and its recent investment in Huya.

Value-added Services (VAS)

In 2019, Tencent derived 53% of group revenues from its VAS businesses. In the last six years, this segment attained a CAGR of 28.2% in revenues where it increased from RMB45.0 billion in 2013 to RMB200.0 billion in 2019. Tencent’s VAS comprise two sub-segments – Gaming and Social Network.

Gaming. Tencent achieved a CAGR of 23.7% over the past six years in Gaming revenues, up from RMB32.0 billion in 2013 to RMB114.7 billion in 2019. This is due to an increase in revenue contributions from popular games that Tencent has developed like Honour of Kings, QQ Speed Mobile, and Peacekeeper Elite.

Social Network. Tencent attained a CAGR of 36.8% over the past six years in Social Network revenue, up from RMB13.0 billion in 2013 to RMB85.3 billion in 2019. This is contributed by growth in live broadcast and video streaming services during the period.

Fintech, Business Services, and Others

In 2019, these businesses contributed 28.9% of group revenues to Tencent. Revenues have increased from RMB622 million in 2013 to RMB108.9 billion in 2019. This makes it Tencent’s fastest growing segment for the six-year period. In essence, its growth was contributed by the following sub-segments:

Mobile Payment Services. In 2013, Tencent launched Weixin Pay/WeChat Pay, a mobile payment services app widely used in China. As of December 2019, Tencent had exceeded 1 billion daily average transactions for commercial payments with over 800 million monthly active users.

Licaitong. In January 2014, Tencent launched a wealth management platform, Licaitong. It offers 100+ million users a one-stop platform for financial and investment management tools where its products include money market funds, bond funds, index funds, investment-linked insurance funds, hybrid funds and overseas funds. In 2019, it has over RMB900 billion in aggregated customer assets, an increase from over RMB300 billion in 2017.

WeBank. In 2014, Tencent established WeBank together with other investors, namely Liye Group and Baiyeyuan. It owns a 30% interest in WeBank for a total investment of RMB900 million. WeBank is a privately-owned digital bank located in Shenzhen which offers retail and SME customers savings, loans, and investment services in China.

Cloud Services. In 2013, Tencent launched Tencent Cloud. Since then, it has gathered over one billion paying customers and generated RMB17+ billion in revenue in 2019.

Online advertising

In 2019, Tencent made 18.1% of group revenues from online advertising. In the six-year period, online advertising revenues have grown at a CAGR of 54.5% over the past six years from RMB5.0 billion in 2013 to RMB68.4 billion in 2019. This is due to:

Social and Other Advertising. This business is the key contributor of growth to its online advertising revenues as it achieved a CAGR of 57.1% over the past four years in revenues from RMB8.7 billion in 2015 to RMB52.9 billion in 2019. It was supported by higher revenue earned from Weixin Moments, Mini Programs, and its mobile advertising networks. 

Media Advertising. In 2019, Tencent generated RMB15.5 billion in media advertising revenues, a 15.4% decline from RMB18.3 billion in 2018. The fall in sales was attributable to two main factors. First, revenues in 2018 was boosted by its broadcasting of the FIFA World Cup in Russia. Second, sales in 2019 was affected by the unpredictability in the broadcast schedules of its media platforms like Tencent video and Tencent news.

Financial performance

Tencent achieved a 10-year CAGR of 40.7% and 33.6% in its group revenues and shareholders’ earnings respectively. Revenues had grown from RMB12.4 billion in 2009 to RMB377.3 billion in 2019. This was due to continuous growth achieved in its VAS, fintech, and online advertising services during the period. As a result, shareholders’ earnings have increased from RMB5.2 billion in 2009 to RMB93.3 billion in 2019.

Source: Tencent

Over the same period, Tencent generated RMB578.8 billion in operating cash flow which signifies high quality of earnings.

COVID-19 impact

Since the initial outbreak in Wuhan, the COVID-19 pandemic has brought many changes to our daily lives and caused disruptions to both businesses and economies worldwide. So, how did Tencent fare during the first half of 2020?

Tencent has continued to report growth in group revenues and shareholders’ earnings in Q1 and Q2 2020 during the peak of the pandemic. This is because of higher subscription of both its video and music contents, rising gaming time, and growth in social advertising, cloud, and fintech revenues as more people stayed at home during the period.

PeriodGroup Revenue (RMB million)Y-o-y GrowthShareholders’ Earnings (RMB million)Y-o-y Growth
Q1 2020108,065+26%28,896+6%
Q2 2020114,883+29%33,107+37%

Investment in Huya Inc.

In 2020, Tencent made two transactions to increase its equity stake in Huya Inc., a leading live game streaming platform in China. Its live streaming of game content includes e-sport tournaments such as League of Legends, King of Glory, and Peacekeeper Elite.

On 3 April 2020, Tencent acquired 16.5 million Class B ordinary shares of Huya Inc. for US$262.6 million. This increases its voting power to 50.9% and equity stakes to 36.9% in Huya Inc.

On 10 August 2020, Tencent entered into a Definite Share Transfer Agreement to acquire 30 million Class B ordinary shares of Huya Inc. for US$ 810 million from JOYY Inc. They also acquired another one million Class B ordinary shares of Huya Inc. from Mr. Dong Rongjie, CEO of Huya Inc. (price undisclosed). Upon completion of this transaction, Tencent would increase its voting power to 70.4% and equity stake to 51.0% in Huya Inc.

The fifth perspective

Tencent has delivered stellar growth in revenue and profit over the past 10 years. As of 30 June 2020, Tencent reported 1.2+ billion monthly active users of Weixin and WeChat worldwide combined, and continues to invest in the development of new games and digital content as means to sustain growth for many years to come.

Ian Tai

Financial content machine. Dividend investor. Produced 450+ financial articles featured on KCLau.com in Malaysia and The Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular host and presenter of a weekly financial webinar with KCLau.com. Co-founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.


    1. Hi Storm,

      We don’t make any recommendations on whether a security is a buy (or sell) as every investor has different investment goals and risk profiles. While we provide a summary of our research, you’d have to make your own decisions whether an investment is suitable for your portfolio. Hope this helps!

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