Afterpay Ltd (ASX: APT) recently welcomed Chinese tech giant Tencent as a substantial shareholder. Tencent had been buying Afterpay shares throughout April until it reached the 5% threshold where a substantial shareholder disclosure was required.
The market reacted to this news yesterday, causing the Afterpay share price to rocket higher.
Tencent is a listed company on the Hong Kong Stock Exchange and provides internet value-added services, including digital entertainment, online advertising, fintech and cloud services. Its flagship products include WeChat, Weixin and QQ. Tencent's Weixin Pay service is the leading mobile platform in China, facilitating over 1 billion commercial transactions per day.
Commenting on becoming a substantial shareholder, James Mitchell, Tencent's chief strategy officer, said, "outside China we have actively invested in pioneering FinTech companies, providing us with unique insights into emerging FinTech services".
Furthermore, addressing Afterpay more specifically, Mitchell commented: "Afterpay's approach stands out to us not just for its attractive business model characteristics, but also because its service aligns so well with consumer trends we see developing globally in terms of Afterpay's customer centric, interest free approach as well as its integrated retail presence and ability to add significant value for its merchant base."
Tencent's investment spree
Tencent generates most of its revenue from gaming, advertising, fintech and cloud markets. However, it also generates approximately a quarter of its profits from its investments in public companies and private unicorns.
Its massive portfolio had an approximate fair value of 352.7 billion yuan (~$77 billion) in 2019 including stakes in well over 700 companies. Tencent often invests in companies that align with its core businesses of gaming and social media. It has put money into ride-hailing, retail, online media and electric car makers both inside and outside of China. This includes a 5% stake in Tesla in 2017 and 7.5% stake in Spotify in 2018.
In the gaming world, Tencent has stakes in numerous household video games. This includes a 5% holding of Ubisoft and 5% ownership of Activision Blizzard. It even fully acquired Riot Games back in 2015, creator of League of Legends – the world's most popular PC game that generated an estimated US$1.4 billion in revenue in 2018. Tencent even made a US$330 million investment for 40% ownership of Epic Games back in 2012 – yes, the owner of Fortnite.
In the fintech space, Tencent recently led the US$45 billion Series B funding round for Lydia, a French mobile payment app. Lydia is one of the most widely used mobile payment apps in France and Italy, especially among young adults. Lydia plans to offer more diversified services by becoming a mobile financial services app.
What does this mean for Afterpay?
Tencent's stake is relatively small and in its early days. It is too early to speculate what this stake means for Afterpay moving forward, but it's clearly a bullish indicator in the short-term (as reflected in yesterday's big share price move).
Tencent's revenues are dependent on its investments and the company has shown a strong record of highly profitable investments. Evidentially, Tencent has a good eye for growth companies and this is a good sign for Afterpay's future.
In the meantime, Afterpay will still be Afterpay – the leading buy now, pay later player that has gone from strength to strength, even amidst the coronavirus pandemic.
