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3 Reasons Why I Think Tencent is a Must-Have Stock

Chinese tech conglomerate Tencent Holdings Ltd (SEHK: 700) has been on a rollercoaster ride since 2017. Its share price was battered over the past year due to concerns over the crackdown by regulators on violent entertainment content, especially in video games.

Tencent’s gaming growth paused momentarily as regulators prevented the tech giant from monetising some of its most popular games.

But you can’t keep a giant down for long. Tencent looks well-positioned to make a comeback. And with the stock trading at over 30% off its all-time high, this could be the perfect time to pick up shares. Here are three reasons why I think this is a must-have stock in anyone’s portfolio.

1. Gaming industry boom

The gaming industry in China is an exciting one and is a market that is expected to increase more than threefold to US$200 billion by 2030, according to UBS.

As the market leader in gaming, Tencent looks poised to ride on the economic tailwinds. On top of that, regulatory concerns are easing. In the past year, regulators have begun to approve some of Tencent’s older games and the company is already coming out with new games to capitalise on.

Its hit game, PeaceKeeper Elite is expected to rake in US$1 billion in 2019. Tencent also released 10 games in the second quarter of 2019, positioning it well for the rest of the year.

2. Social media platform growth

The tech giant also owns one of the most valuable apps in China- Wechat. Weixin (China-based version for users in China) and WeChat boast a combined 1.1 billion users. On top of that, its online chat app, QQ and Qzone had a combined 1.2 billion in monthly active users.

In the second quarter of 2019, its social media advertising revenue increased 28% on year to RMB 12 billion (US$1.68 billion). And yet it seems that there is more room for growth. Facebook generated US$6.94 in advertising revenue for each monthly active user in the corresponding quarter. In the Asia Pacific region, Facebook generated US$3.01.

On the other hand, Tencent’s advertising revenue per user is just US$0.70, well below what Facebook generates per user. If Tencent can close the gap, we could see revenue from this advertising double or even triple in the near future.

3. Diversified revenue stream

Although online games and social networks contributes the bulk of Tencent’s revenue (54%), Tencent has multiple revenue streams that are becoming increasingly important.

Its cloud computing service is still a distant second to the market leader, Alibaba Group’s (NYSE: BABA) AliCloud, but Tencent could catch up as it expands its cloud computing service to other industries such as retail. Its Fintech arm is also rapidly growing.

Tencent also generates a ton of free cash flow, which allowed it to make investments in over 700 companies, ranging from established powerhouses such as US Gaming giant, Activision Blizzard and other bets such as quantum computing and facilitated healthcare. With its investment in other tech companies, Tencent is becoming the Google of the East.

Time to buy

Tencent’s diversified business model ensures it can ride the tailwinds of multiple industries at the same time. On top of that, its core business generates so much cash, it is able to support investments in moonshot companies that could potentially be massive winners in the future.

Right now, Tencent trades at a 32x price-to-earnings multiple. Given its enormous growth potential on multiple fronts though, Tencent is most definitely a buy in my books.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jeremy Chia owns shares in Tencent Holdings Ltd.