Tencent remains active in China, even as geopolitical risks cloud dealmaking in India, US

Tencent Holding Ltd

Chinese tech giant Tencent Holdings Ltd invested aggressively in global startups in the first half of 2020 — striking, on average, a new deal every three days.

The Hong Kong-listed gaming and social networking major — with a market cap of HK$4.82 trillion ($621 billion) —invested in about 60 startups across the globe in the first six months of 2020, according to statistics collected by PEdaily, a PE/VC-focused online publication of China’s Zero2IPO Group.

Going forward, though, geopolitical tensions and the coronavirus pandemic could weigh on Tencent’s deal-making activity, particularly in the US and India. However, its investments at home are likely to remain robust.

“It’s possible that overall Chinese investment in these two countries [India and the US] will slow down, likely voluntarily, as investors and entrepreneurs are taking a wait-and-see approach on the upcoming US presidential election and Sino-India relations,” Alex Liu, an analyst at the investment bank China Renaissance, told DealStreetAsia.

The year 2020 has been a bumpy ride so far for Tencent and other Chinese tech behemoths amid growing hostility in the US and India.

President Donald Trump, in early August, unveiled sweeping bans on Tencent’s superapp WeChat and ByteDance’s video-sharing app TikTok citing national security concerns. While TikTok may have reached a deal with Oracle and Walmart to circumvent the ban, WeChat’s future in the country still hangs in the balance.

Tencent’s investments in the US include Los Angeles-based games developer Riot Games; California-based gaming firm Activision Blizzard; North Carolina-based Epic Games; and social news aggregator Reddit. It also holds a 5 per cent stake in Tesla, which it acquired for $1.78 billion in 2017, and a 12 per cent stake in messaging app operator Snap.

In India, meanwhile, the Chinese tech giant encountered a similar plight. In early September, India blocked over a hundred Chinese apps, including Tencent’s popular mobile shooter ‘PUBG Mobile’ and multiplayer online battle arena ‘Arena of Valor’, following a military skirmish between the countries along the disputed Himalayan border.

Shrinking deal size in India

Tencent is already cautious of fresh investments in India.

The company injected a cumulative $87 million in seven Indian startups so far this year. That’s down 79.5 per cent from the $425 million invested in the entire 2019, show data from Venture Intelligence. While the deal count is an improvement from 2019’s six deals, the investment size in India has visibly shrunk on a quarter-on-quarter basis.

The capital Tencent put into Indian startups this year stood at $28.7 million, $13.6 million, and $44.6 million in Q1, Q2 and Q3 (till date), respectively. In comparison, it had invested $263.1 million in Q4 2019 and $161.7 million in Q3 2019.

“I personally think Chinese companies, including Tencent, are being impacted by the geopolitical tension,” said Liu. “India is obviously a big market with one of the largest internet user bases in the world. However, the recent political tension between China and India makes it hard to predict whether Tencent will continue its previous investment strategy going forward.”

Chinese e-commerce giant Alibaba, Tencent’s arch-rival in lapping up promising startups in India, has already put on hold its India investment plans, according to a Reuters report in late August that cited two sources. The report added that Alibaba had no plans to reduce or exit its existing investments in the country.

Alibaba backs companies like fintech firm Paytm, food delivery service Zomato, and e-grocer BigBasket in India.

In the next few months, Tencent might find itself in a more unfavourable position in terms of investing in India, as COVID-19 infections grow faster in the country than anywhere else in the world. India is home to the second-highest number of COVID-19 patients after the US.

Policywise, Indian authorities have clamped down on foreign investments since April to block “opportunistic takeovers of Indian companies due to the current COVID-19 pandemic.” The new rules stipulate that any entity based in or tied to a country “which shares [a] land border with India” would require government approval before investing in an Indian firm— even if it is an indirect investment.

While Tencent continues its “generally prudent” investment approach to invest in businesses that create synergies, Liu maintained that it is hard to forecast the firm’s investment strategy outside of China in 2021 and beyond, given “too many uncertainties on the policy landscape.”

Top investments by Tencent in Indian startups (2015 – 2020 YTD)

Expand Table

CompanyInvestorsAmount (Millions USD)*Month
FlipkartTencent, M12, Others$1,4002017-03
SwiggyTencent, DST Global, Hillhouse Capital, Coatue Management, Naspers, Wellington Management, Others$1,0002018-12
Ola CabsTencent, Falcon Edge Capital, UC-RNT Fund, Tekne Capital Management$8392017-03
UdaanTencent, Altimeter Capital, GGV Capital, Lightspeed Ventures, DST Global, Hillhouse Capital, Others$5862019-08
HikeTencent, Tiger Global, Foxconn$1752016-08
SwiggyTencent, Naspers, Wellington Management, Korea Investment Partners, Samsung Ventures, Others$1532020-02

Source: Venture Intelligence (*Includes share of co-investors)

In China, Tencent-backed deals total $6.3b

By contrast, Tencent’s home market remains an attractive proposition.

Most businesses in the country have started to recover from the pandemic in the second quarter. In August, the government shored up the domestic capital markets with initial public offering (IPO) reforms on Shenzhen’s startup board ChiNext. This, in turn, gave private market fundraisings a boost, as investors eye clearer paths to exit.

In the first eight months of 2020, Tencent has poured money into at least 16 startups in the Greater China region. The total funds raised by these firms amounted to over $6.3 billion, according to proprietary data compiled by DealStreetAsia.

Between January and August, Tencent’s deal-making activity in China focused on growth-stage companies in their Series C round and beyond. Although the amount of capital it invested in each of the startups remains undisclosed, over 56.2 per cent of the 16 deals are megadeals worth $100 million or more.

Tencent was the lead investor in five of the 16 deals, placing bets on the same batch of startups alongside top-notch private equity and venture capital firms including Beijing-based IDG Capital, Neil Shen-led Sequoia Capital China, Asia-focused PE major Hillhouse Capital, and Japan’s SoftBank.

It participated in two billion-dollar deals, namely a $1-billion Series G round in online education platform Yuanfudao, and a $2.4-billion Series D+ round in real estate brokerage firm Beike Zhaofang – two of the three largest financing rounds in Chinese startups so far this year.

Tencent has achieved “generally robust operating and financial results” in Q2, said Ma Huateng, founder, chairman and CEO of Tencent, in a press release to announce the firm’s interim results. “We are committed to investing in talents, technology and platforms in a disciplined manner to embrace the emerging structural opportunities and challenges ahead.”

The company, which generates the majority of its revenues in the home market, has seen its shares rally about 37 per cent on the Stock Exchange of Hong Kong so far this year. Tencent’s revenues stood at 222,9 million yuan ($31.5 million) in the first quarter of 2020, up 28 per cent compared to the same period in 2019. Its profit in H1 was 59.2 million yuan ($8.4 million), up 29 per cent year-on-year.

Top investments by Tencent in Chinese startups (Jan – Aug 2020)

Expand Table

StartupInvestment Size (Million USD)Investment StageLead Investor(s)Other Investor(s)VerticalMonth
Beike Zhaofang / Ke.com$2,414D+-SoftBank, Tencent Investment Investment, Hillhouse Capital, Sequoia Capital ChinaReal Estate Tech2020-03
Yuanfudao$1,000GHillhouse CapitalBoyu Capital, Tencent Investment Investment, IDG CapitalEdTech2020-04
Xingsheng Selected$800C+KKR Sequoia Capital China, Tencent Investment Investment, Tianyi CapitalE-commerce2020-07
Missfresh$495-CICC CapitalTencent Investment Investment, Goldman Sachs Asset Management, Tiger Global Management, ICBC International, Governemnt-led industry fund in SuzhouE-commerce2020-07
Yipin Shengxian$359CTencent Investment Investment, Capital TodayEastern Bell Capital E-commerce2020-08
MiningLamp Technology$300ETencent Investment Investment, Temasek HoldingsKuaishouBig Data2020-03
Shimao Service$244Strategic Investment-Sequoia Capital China, Tencent Investment InvestmentReal Estate Tech2020-05
Waterdrop$230DTencent Investment Investment Investment, Swiss Re-insurance CompanyIDG Capital, Light-Up Capital Insurtech2020-08
Airwallex$160DANZi Ventures, Salesforce Ventures, Tencent Investment, DST Global, Sequoia Capital China, Hillhouse Capital, Horizon VenturesFintech2020-04

Source: DealStreetAsia

Smart retail, SaaS focus

Martin Lau, president of Tencent, spearheads the firm’s ambition to grow outside China and build a gigantic investment portfolio around social and digital content, online-to-offline (O2O), smart retail sectors to strengthen and complement its core businesses.

Lau joined the firm in 2005 from Goldman Sachs Asia’s investment banking division and led Tencent’s $8.6 billion acquisition of Finnish mobile game maker Supercell from SoftBank in 2016, which laid the foundation for what is now the world’s largest online gaming empire.

Today, Tencent’s online gaming business generates about one-third of its revenues. It was built through in-house development and acquisitions. The firm owns the world’s top PC client game by revenue, League of Legends, owned by Riot Games, whose 93 per cent stake it had acquired for $400 million in 2011. It scooped up the remaining 7 per cent in 2015 for an undisclosed amount.

It also acquired stakes in Epic Games, Activision Blizzard, Glue Mobile, and Pocket Gems in the US as well as about 10 online gaming companies in South Korea in the past decade.

In recent years, Tencent has been expanding beyond China and its core businesses through equity investments.

Across sectors, Tencent first invested in e-commerce major JD.com in 2014, local services platform Meituan-Dianping in 2014, and e-commerce app Pinduoduo in 2016 — three of the five most valuable Chinese Internet companies apart from Tencent itself and Alibaba.

“Previously our traditional investment sectors were mostly focused on video games content and frontiers of science and technology,” Lau had said at a conference in January which the firm posted on its social medial account. “However, with the development of Tencent’s WeChat mini-app ecosystem and payment platform, we will pay more attention to smart retail and payment platforms in future.”

In Greater China, Tencent has made bold bets in the fields of e-commerce (especially fresh produce e-commerce), Software-as-a-Service (SaaS), real estate tech, and edtech between January and August 2020.

It wrote sizeable cheques for three growth-stage fresh produce e-commerce players, namely Xingsheng Selected, Missfresh, and Yipin Shengxian, which raised $800 million, $495 million and $359 million, respectively, between July and August, after China’s highly-competitive fresh produce e-commerce sector enjoyed significant growth as consumers shifted online to replenish their daily supplies due to the coronavirus outbreak.

In spite of its preference for growth-stage, large-ticket deals, Tencent still actively invested in the country’s more nascent SaaS players serving corporate clients. It participated in three smaller deals in NextData, Leyaoyao, and Shushi, in which the startups raised $73 million, $21.5 million and $14 million, respectively.

SEA ventures

After enjoying one of its fastest revenue-growing quarters in two years this year, Tencent has heightened efforts to explore opportunities in Southeast Asia’s emerging markets, which has put it in direct competition with domestic rivals Alibaba and ByteDance in the region.

The company announced in mid-September that it would open a new office in Singapore as a “strategic addition” to facilities in Malaysia, Indonesia, and Thailand. According to sources cited in a Bloomberg report, Tencent has been considering the shift of some business operations, such as international game publishing, out of the home country.

Geopolitical risks are considered by Chinese internet firms as an increasingly important factor to decide “which overseas market to allocate their capital” and “which markets still boost risk-reward opportunities,” said Shi Jialong, an equity analyst at Japan-based global financial services firm Nomura.

“As long as there is no political barrier to investments from China, companies like Tencent will continue to invest in the markets they see fit. And whether or not they invest in new companies will largely depend on the overall environment,” said Shi.

Southeast Asia, a region that hosts about 655 million increasingly affluent people, has become the next key battlefield for Chinese tech giants to implement their global strategies amid crackdowns in India and the US.

ByteDance is heavily promoting sister apps like Singapore-based business messaging service Lark and music streaming firm Resso. In 2019, its short-form viral video app TikTok recorded 43.5 million monthly active users (MAUs) across Indonesia, Vietnam, Thailand, and Malaysia, according to an internal 2019 presentation cited by Reuters.

The firm has also applied for a digital banking licence from Singapore’s central bank, alongside Alibaba-backed Ant Group and Tencent-backed Sea Ltd, which operates gaming platform Garena and e-commerce firm Shopee.

In May 2020, Alibaba acquired half of Singapore’s AXA Tower in a deal that valued the property at S$1.68 billion ($1.2 billion). Lazada, Alibaba’s Southeast Asia e-commerce unit in which it had bought control in 2016, is the AXA Tower’s anchor tenant.

The Chinese e-commerce juggernaut had ponied up a total of $4 billion between 2016 and 2018 to take full control of Singapore-based Lazada. The regional e-commerce player, which now operates in Indonesia, Malaysia, the Philippines, Thailand, Vietnam and Singapore, is poised to serve 300 million customers by 2030, according to its website.

Earlier this month, Alibaba was reportedly in talks to invest $3 billion in Southeast Asia’s ride-hailing giant Grab, a regional competitor to Tencent-backed, Indonesia-based Gojek.

Chinese giants-led competition is expected to spice up in Southeast Asia. In one of its latest efforts to expand footprint, Tencent confirmed with DealStreetAsia in June its acquisition of the assets of the content, technology, and resources of Malaysia-based video streaming platform iflix, which had bailed the loss-making business out of a debt crisis worsened amid the COVID-19 pandemic.

“This is in line with our strategy to expand our international streaming platform, WeTV, across Southeast Asia and provide users with international, local and original high-quality content in a wide range of genres and languages,” said Tencent in an email reply.

Liya Su contributed to the story.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.