“Facebook of China to Deliver Your Next Double” (Robert Hsu)

Uncovering an Asia Edge tech teaser

By Travis Johnson, Stock Gumshoe, February 24, 2011

Robert Hsu has been running this teaser ad for his Asia Edge newsletter for a week or two now, and I’ve gotten enough questions that it seems there’s some demand for the Gumshoe version (ie, the free version) of the answer.

It seems unlikely, by the way, that this tease about the “Facebook of China” is actually coming out at roughly the same time that the arguably more real “Facebook of China” is filing to go public — the tease is about an older company that’s in a different sort of social networking niche, arguably, but, in case you’re curious, what most folks think of when they think of China’s Facebook (Facebook itself was effectively kicked out of China for being too hard to censor) is a company called Renren. More about Renren here if you’re curious, but they’re not yet public so they’re obviously not Robert Hsu’s “next Facebook” that he thinks will double your hard-earned dollars.

So … who is? Well, for that we’ve got to scour Hsu’s clues:

“Imagine…

“A little-known Chinese juggernaut whose $2 billion in revenues are growing three times faster than Facebook’s…
“Whose social networking site already claims 600 million paying members…
“Whose publicly traded stock has handed investors 300% profits in two years and is on track to deliver another 50% gain in the next 30 days…”

It may not have jumped out at you, but $2 billion in revenue is huge for a Chinese internet company — that’s almost twice the revenue that Baidu (BIDU), the mega “Chinese Google” reported over the last four quarters, and Baidu is a $40 billion company, the biggest US-listed Chinese internte stock by far, unless you want to include the telecoms like China Mobile.

But this isn’t BIDU, of course, or China Mobile (CHL — which had, by the way, $70 billion in revenue over the last year). No, it’s someone else … and really, in this space there’s only one other “someone else,” but in case you don’t know them I’ll keep the suspense going for a moment while we peruse some more clues:

“China’s Facebook, on the other hand, derives only 12% of its income from ad sales while the balance of its $2 billion in annual revenues comes from subscription-based “Internet value-added services….”

“You see, while millions of users have flocked to Zuckerberg’s Facebook because it was free from the beginning, its users expect it to be free for the rest of their lives and will stage an Internet strike if management ever decides to charge for their service.

“China’s homegrown social networking website, on the other hand, doesn’t have the problem, as it has never been free—which is why its revenue is growing three times faster.”

Aha, so … 12% of income from ad sales. What else?

“… highly profitable subscription-based model that’s only free for a limited period of time. After that, you’re on a recurring revenue cycle that hardly anyone cancels—just like your monthly subscription to cable TV.”

And …

“Our time-proven indicators show that the company is set to repeat its 55% quarterly revenue growth when it declares earnings March 13th.”

More? Sure!

“… this company, with its long telecom roots, has been making money for investors since 1998—when Zuckerberg was in high school—all thanks to its highly popular subscription-based Internet Messaging, Chat and Gaming services….

“during the third quarter of 2010, the company’s revenues increased 55% over the year before, while gross profit jumped 68%—thanks to increased popularity of mobile social games and a huge jump in membership.”

Well, I don’t really know what Facebook is worth — I continue to use it on occasion, and to completely ignore the advertising that pays their bills, so I have my doubts about their ability to ever be a high margin business … but certainly having the most popular website in the world, which seems their likely position for a while now, has to be worth a lot.

But I can tell you that I’m almost certain that Robert Hsu here is teasing Tencent, which is indeed the biggest ($46 billion market cap, a little bit bigger than Baidu) and probably least-well-known Chinese internet company for US investors.

That is, of course, because it trades primarily in Hong Kong at ticker 0700 — you can also buy it pretty easily through the pink sheets at TCEHY, where volume and pricing tends to be decent for small investors as long as you’re not intending to trade in and out much. Do remember, if you ever trade this one, to rely on the Hong Kong closing price for the “real” price and do your currency conversion to set fair limit prices.

Now, why do I say “almost certain?” Because Hsu included a couple clues that don’t match — they could be intentional errors to mislead your friendly neighborhood Gumshoe, they could be actual mistakes, or they could mean that there’s some other multi-billion dollar Chinese internet company that I’ve never heard of. I think the first two are more likely, and I’m pretty sure I’m right about this being Tencent, but I can’t tell you that I’m 100% certain this time because of those odd clues.

The $2 billion in revenue is right on — including a solid third quarter of $780 million in revenue. The third quarter also brought a 55% revenue increase over the 2009 Q3, so that’s a match (and a 12% sequential increase from Q2, just FYI — and revenue has just about doubled from 2008 to 2010).

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The 12% from advertising? That’s not the case for Tencent, at least in the last quarter — Tencent’s Q3 included $57 million in online advertising revenue, less than 10% of the total, and, though the number is