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How Tencent is Looking to Dominate This US$45 Trillion Industry

Foreign financial companies like Goldman Sachs and Blackrock aren’t the only ones planning to gain market share in China’s huge US$45 trillion financial industry.

China’s tech giants are also getting into the game. Among the leaders is Tencent Holdings Ltd (SEHK: 700), whose financial operations are growing quickly despite their large size. Here’s how Tencent is growing and looking to be a dominant player in the huge sector that is China’s financial industry.

Tencent’s financial arm is huge

Tencent’s financial operation, which includes a payments business, wealth management services, and partial ownership of a bank, is huge.

Specifically, Tencent’s payments business, Tenpay, is a strong number two to Ant Financial’s Alipay. According to some estimates, Tenpay, which includes QQ Wallet and WeChat Pay, is worth as much as US$137 billion.

Tencent’s wealth management platform, LiCaiTong, is no slouch either with over RMB 800 billion (US$112 billion) in assets under management (AUM) at the end of June 2019.

Tencent also owns 30% of WeBank, an online-only bank that was valued at around US$21.3 billion in November of 2018.

Altogether, Tencent’s fintech business could be worth between US$160 billion to US$230 billion according to a Bernstein estimate last year.

Tencent’s fintech division a big growth driver

Tencent is a fast-growing company. For its third quarter of 2019, Tencent’s sales rose 21% year-on-year to RMB 97.2 billion while its net profit attributable to equity holders rose 24% year-on-year to RMB 24.4 billion.

Tencent’s financial segment is a big growth engine. In terms of its segment sales for the third quarter, its online game sales rose 11% year-on-year while social network sales rose 21% year-on-year. Tencent’s FinTech and Business Services grew the fastest of the three with 36% year-on-year growth.

In terms of third-quarter sales, Tencent’s Fintech and Business Services’ revenue of RMB 26.8 billion was actually bigger than Tencent’s Social Network division’s sales of RMB 22 billion as well.

Key competitive advantages

Tencent also has several advantages versus many of its competitors in China’s financial sector that could allow the tech conglomerate to gain market share.

First and foremost, Tencent has enormous economies of scale. Because it owns social media platforms that more than a billion users collectively use monthly, Tencent can sell its users financial products it develops or purchases at a lower cost than many of its competitors.

Thanks to its massive mobile payment and social media divisions, Tencent also has a lot of data concerning its customers that competitors don’t have. With more data, Tencent could potentially make better credit decisions or offer a more competitive rate.

By making better credit decisions, Tencent’s margins could potentially be higher than comparable competitors. By offering more competitive rates, Tencent could potentially gain more market share.

Tencent also has a technology advantage versus many of its competitors. Due to Tencent’s efforts to unlock value in its social media operations, it has some of China’s latest cutting edge AI and big data technology. The company can adjust the tech developed to unlock value in its fintech operations.

Perhaps most importantly, Tencent has the pocketbook to buy market share. Gaining market share in competitive markets isn’t easy and it can often take years of losses before efforts bear fruit.

Given its strong balance sheet and substantial free cash flow, the tech giant has the financial resources to tolerate losses in exchange for market share.

Foolish conclusion

Tencent is more than just a social media and gaming company. It is a massive technology conglomerate with a very promising fintech branch and it could end up being one of the key players in China’s huge financial industry.

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 Jay Yao doesn't own shares in any companies mentioned.