Masaryk University Faculty of Economics and Administration

MASTER’S THESIS

2019 Olha KANARCHUK

Masaryk University Faculty of Economics and Administration Field of study:

THE FUNDAMENTAL ANALYSIS OF AN ONLINE-BASED TECHNOLOGY COMPANY

Master’s Thesis

Supervisor: Author: Ing. Dagmar, LINNERTOVÁ, Ph.D Olha KANARCHUK

Brno, 2019

MASARYK UNIVERSITY Faculty of Economics and Administration

MASTER’S THESIS DESCRIPTION

Academic year: 2018/2019

Student: Olha Kanarchuk

Field of Study: Finance (Eng.)

Title of the thesis/dissertation: Fundamental analysis of an online-based technology company

Title of the thesis in English: Fundamental analysis of an online-based technology company

Thesis objective, procedure and methods used: The aim of the thesis is to carry out financial and fundamental analysis of an online-based technology company and formulate investment recommendation.

The process of work: 1. Introduction, methodology and data 2. Theory of financial and fundamental analysis 3. Analysis of the online-based technology industry with respect to an analyzed company 4. Financial analysis of a particular company 5. Computation of the intrinsic value of the stock using methods and tools of fundamental analysis 6. Discussion of results, formulation of investment recommendation 7. Conclusion

Methodology: analysis, comparison, deduction

Extent of graphics-related work: According to thesis supervisor’s instructions

Extent of thesis without supplements: 60 – 80 pages

Literature: DAMODARAN, Aswath. Damodaran on valuation : security analysis for investment and corporate finance. 2nd ed. Hoboken: Wiley, 2006. xi, 426. ISBN 0471751219.

PINTO, Jerald E., Elaine HENRY, Thomas R. ROBINSON, John D. STOWE and Stephen E. WILCOX. Equity asset valuation. Third edition. Hoboken, New Jersey: Wiley, 2015. xix, 595. ISBN 9781119104261.

BREALEY, Richard A., Stewart C. MYERS and Alan J. MARCUS. Fun- damentals of corporate finance. Ninth edition. New York: McGraw- Hill Education, 2018. xxxi, 726. ISBN 9781259921964.

COLLINS, James C. Good to great and the social sectors : why busi- ness thinking is not the answer. [Boulder, Co.]: Jim Collins, 2005. 35 s. ISBN 0977326403.

MARTIN, S and Fridson Fernando ALVAREZ. inancial Statement Ana- lysis: A Practitioner’s Guide. 4. vyd. : Wiley Finance Editions, Band 597, 2011. ISBN 978-0-470-63560-5. Page 1 of 2 Thesis supervisor: Ing. Dagmar Linnertová, Ph.D.

Thesis supervisor’s department: Department of Finance

Thesis assignment date: 2018/10/31

The deadline for the submission of Master’s thesis and uploading it into IS can be found in the academic year calendar.

In Brno, date: 2019/05/16

Page 2 of 2 The aim of the thesis is to carry out financial and fundamental analysis of an online-based technology company and formulate investment recommendation.

Name and surname of the author: Olha Kanarchuk Master’s thesis title: Fundamental analysis of an online-based technology company Department: Finance Master’s thesis supervisor: Ing. Dagmar Linertová, Ph.D. Master’s thesis date: 2019

Annotation The aim of the thesis is to carry out financial and fundamental analysis of an online-based technology company and formulate investment recommendation.

Keywords Tencent, Alibaba, internet-company, Wechat, China, media, games, Facebook

Declaration „I certify that I have written the Bachelor’s/Master’s Thesis by myself under the supervision of and I have listed all the literary and other specialist sources in accordance with legal regulations, Masaryk University internal regulations, and the internal procedural deeds of Masaryk University and the Faculty of Economics and Administration.“ Brno,

Author’s signature

Acknowledgement I would like to thank all people that have supported me with the knowledge obtained through whole my life which out to my interest to the topic concerned. I am grateful for the life experience and the point of view on the things happening in the world that helped me to make this investigation. Despite this, I feel strong will to get deeper insight for the future and will be polishing my skills to reach the real understanding of the subjects and refer it to the society.

TABLE OF CONTENTS

PART 1: INTRODUCTION, METHODOLOGY AND DATA………………………...… 1

PART 2: FUNDAMENTAL ANALYSIS…………………………………………………….3

1.1 REQUIRED RATE OF RETURN……………………………………………….....…..3

1.2 ALPHA…………………………………………………………………....…..…….3

1.3 BETA………………………………………………………………………..………4

1.4 RISK FREE RATE…………………………………………………………….……..5

1.5 EQUITY RISK PREMIUM……………………………………………………………6

1.6 DIVIDEND DISCOUNT MODEL…………………………………………………..….7

1.7 CAPITAL ASSET PRICING MODEL ………………………………………….7

1.8 MULTIFACTOR MODEL…………………………………………………………….9

1.9 FAMA-FRENCH MODEL…………………………………………………………….9

1.10 WEIGHTED AVERAGE COST OF CAPITAL………………………………………10

1.11 INDUSTRY ANALYSIS. PORTER’S “FIVE FORCES” …………………………...…12

PART 3: ANALYSIS OF THE ONLINE-BASED TECHNOLOGY INDUSTRY WITH

RESPECT TO AN ANALYZED COMPANY……………………………………………...15

3.1 TENCENT COMPANY……………………………………………………..………..15

3.2 CHINA’S E-COMMERCE SUCCESS…………………………………………..……..17

3.3 WECHAT……………………………………………………………………..…...20

3.4 CHINESE MODEL……………………………………………………………..…...25

3.5 TENCENT GAMES……………………………………………………………..…..29

3.6 WEPAY VERSUS ALIPAY…………………………………………………….…...38

3.6 INVESTMENTS RACE………………………………………………………………42

3.6 TENCENT AND NET EASE…………………………………………………………43

PART 4: FINANCIAL ANALYSIS OF A PARTICULAR COMPANY …………………45

4.1 STOCK FLUCTUATIONS……………………………………………………………45

4.2 AMERICAN-CHINESE TRADE WAR……………………………………………...…47

4.3 PRICE TO EARNINGS RATIO……………………………………….………………47

PART 5: COMPUTATION OF THE INTRINSIC VALUE OF THE STOCK USING

METHODS AND TOOLS OF FUNDAMENTAL ANALYSIS………………………….52

5.1 FREE CASH FLOW OF THE FIRM ANALYSIS……………………………………..52

5.2 FREE CASH FLOW TO THE EQUITY ANALYSIS………………………………….54

PART 6: DISCUSSION OF RESULTS, FORMULATION OF INVESTMENT

RECOMMENDATION……………………………………………………………………..56

6.1 ADVANTAGES AND DISADVANTAGES………………………………….……....….56

6.2 TENCENT BEHAVIOUR AS INVESTOR………………………………………..…….57

6.3 INVESTING IN THE INVESTOR………………………………………………….….58 CONCLUSION………………………………………………………………………………60

LIST OF LITERATURE……………………………………………………………………62

LIST OF GRAPHS…………………………………………………………………………..71

LIST OF TABLES…………………………………………………………………………...72

LIST OF IMAGES………………………………………………...…………………………...73

PART 1: INTRODUCTION, METHODOLGY AND DATA

The following research is based upon the current tendency of globalization online industry and its competitors. Within the internet popularity, people started to seek for different ways to connect their life styles and behaviours to the online systems that are supported by intelligent systems of calculations. The use of such increases the effectivity of the person and helps to stay in touch with all spectre of offers included into the program. Nowadays, those who provide such offers are those who can gain the most from the customer. The demand is growing exponentially with people desires to speed up their everyday life by using different tools as messaging services available to simultaneously show your friends activity and news from press-conference of European Union. Along with, it grows up to people’s way to rest and relax. The media industry had developed a lot for these past 20 years: from television to computer and now highly popular smartphone applications. But not only these two. The ban system is no longer just financial institution. With the growth usage of mobile banking it came possible to get rid of credit/debit cards in its well-known physical realization. Payments using smartphones, for instance IPay, and even fully online reliable banking system are shifting the standards. During investigations prior to writing the following plot, it became clear that this whole spectre of supply and even more is covered by the single, unknown to the mass giant company – Tencent Holdings. The company is settled in the Chinese market and has grown supplying the people’s needs in the online sphere since 1998 and remained unknown to the most society of Western world for years until it came out on the market with a strong policy and intentions. The company we will investigate is not just the Facebook of China as people tend to think, it is same as Google, similar to IPhone, has a great competition with Amazon and far more companies we can imagine. While Europe and America leaves with different kinds of products useful for each need, the Tencent has created all in one product. However, despite most of concerns that company is willing to take over the world and exert its authority is not quite right form to say. Before starting with the research itself, in Part 2: Fundamental Analysis, we will summarize the theoretical information about the essential models, key formulas and theories to pick up the best and appropriate ones and also base our information on the general and standardized way to describe the company. Within this Part we will need to note the most basics to rely on in the further analysis.

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In this research we will focus on examining of the giant conglomerate from different parts of its business. In the Part 3: Analysis of The Online-Based Technology Industry with Respect To An Analysed Company we will deep into the details of ruling their products and taking over the markets. What is more, within this Thesis we will also make our assumptions of Tencent’s success based on the clear evidence and facts summarized in this investigation. It is the most voluminous part of the research since it needs to be investigated several industries that are intersect with the internet-based industry. Basically, he industry we are making research on has grown from several different branches, indeed all the industries that do not require the physical work are day by day coming to an internet-based industry. In other words, it is better to say that investigated industry has grown so large that covers all others. In the current Thesis we will try to concentrate on the most valuable from the perspective of the Company parts. Consequently, in the Part 4: Financial Analysis of A Particular Company and the Part 5: Computation Of The Intrinsic Value Of The Stock Using Methods And Tools Of Fundamental Analysis we will get to the company’s evaluation process, compare its position on the market to other competitors and give a proper quotes concerning its current situation, probability of growth. This part requires from investigator to connect the evident information about company’s activity on the market with its actual revenues, intrinsic value and market estimations that becomes the key purpose of investigation. Finally, in the Part 6: Discussion of Results, Formulation of Investment Recommendation we will summarise the investigated data, compare it to results of calculations and give our personal view on the Tencent’s policy. In addition, we will try to analyse the probable frameworks of other successful companies to create an advice for businesses of other companies and assume the policy of Tencent’s development.

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PART 2: FUNDAMENTAL ANALYSIS

To get a clear and understandable result upon investigating the chosen company it is necessary to determine variables that will be investigated and state their impact on the analysis process. In the Chapter of Fundamental Analysis, we will turn to the basic figures, model compounds and its meaning in our analysis to get a better understanding of the subject.

1.1 Required Rate of Return

Each investor seeks for its gain on the market. There are a few basic factors which he takes into consideration. These are the risk and gain from it. Both are tightly bound in any financial activity. Therefore, there are certain levels of expectation from an asset which is chosen and is estimated. The required rate of return (the gain) describes the lowest expectations from it. While the risk included shifts these expectations: the higher risk includes the higher expected return and vice-a-versa. Whereas the expectations of investor are higher or lower than required return the asset is called as undervalued or overvalued respectively. [3]

1.2 Alpha

The alpha is used as the fundamental estimation of the variable stocks in one branch of the market. By gaining the biggest positive result of alpha investor can be sure that among all other assets on the market, exactly this company shows its best performance relative to a benchmark index of others. Below it is shown how alpha can be found. Let us talk about another rate of return - the expected return. It is usually meant to be nearly the same or even equal to the required return. It might be caused by the assumption of some financial models such as Capital Asset Pricing (about which we are going to talk later) that tells us to use our expectations from the asset is equal to required return. Despite this, the existing difference between these two figures is called the Expected alpha and is calculated as: [Expected Alpha = Expected return - Required return]

Such a difference may make an outcome of zero. Therefore, the asset is called a zero alpha asset or efficiently priced asset. The efficient price is reached by equalling the price of an asset to its intrinsic value. Basically, it is just the way to say that the estimated company has reached an average level of return on the market. In this case, the assumptions of financial models (a reference to the substitution of expected rate and required rate of return) can be used as credible and reliable.

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Although expected alpha is used in valuing the asset it is not as helpful in the investigation of results as realized alpha. We use the following formula to calculate it:

[Realized alpha = Actual holding period return - Contemporaneous required return]

Realized alpha is more useful in calculating the present performance of the company on the market if it is used jointly with valid report data. But it is unreliable by adjusting it for the broadcasting purposes.

1.3 Beta One of the most important figures that will be used in further in the models is the Beta Coefficient. It visualizes the risk that observed company or several might take because of volatility on the market; describes how the stock’s return to the market affects the company’s overall return; shows the portion of the risk of the market that future asset in the portfolio will include. Thus, beta in our calculations makes valuable adjustments in formula responding to the changes on the market. In other words, we include the systematic risk into our formulas to adjust calculations.

[Beta = Covariance of asset i with the market portfolio/Variance of the market portfolio]

The Beta coefficient of one means that asset taken on estimation will react to market changes in the same way it rises or falls. The positive Beta of more than one, for instance, 2, means that by rising or falling of the market by 10% for the asset it will take rise or fall accordingly by 20%. A positive number of 0.5, to say, will cause changes in the asset by only 5%. Rarely, but not never, the beta coefficient can be a negative number. In such case, whenever the market reaches 10% above the previous result, beta -1 will tell that investigated asset falls by the same amount and vice-a-versa. This barely happens, because this should mean that in the same industry field there is a company which is affected by changes in the opposite way that other similar companies do. These cases are deeply investigated and commonly found not related to the same branch of companies for the reasons of investigation failures. [6] Due to the excessive influence of the market on the asset which beta is more than 1, investors prefer to think about it simpler way as a risky asset. On the other hand, Beta below 1 is concerned to be safer and less risky. Concluding, the 0 betas is meant to be riskless. This makes some sense if you think of the asset that is not influenced by the market at all and does not change its value.

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The Beta that we discussed is also known as Equity Beta. The reason why it is named so lies at the equity debt that is included in it. The Equity Beta reflects not only the dependence of the security to the market but also to its own capital structure, debt and leverage. That is why we can also see the name of Levered Beta. It might be sufficient to put off the impact of the debt capital aside to find out the clear risk of company’s assets. The risk that investors take is not described by the market only. The borrowing of the company reflects its risk same much. With the high debt to equity ratio company will have to consider service those borrowings and pull out these from earnings. The more it does so, the more uncertainty and risks follow to the future of the company, thus to the security of investor. [7] By removing this risk we will find the Unlevered Beta or other way called - Asset Beta. To do so, we use the following formula:

[Asset Beta = Equity Beta/(1+(1-Tax Rate)(Debt/Equity)]

To proceed with the following calculation into our analysis we will have to take the set of companies within the same market and un-lever each one. Afterwards, we find the mean of the whole set and re-lever it upon the capital structure of the selected company. [7]

1.4 Risk Free Rate The equal correspondence of actual return and the expected return describes the Risk Free Rate. This is also called a zero risk investment due to the absence of any threat to the future return. At least, it is expected to be so. Different treasury bills are the typical representatives on practice. However, it is named for being free of risk, it does not appear to be as common in reality. The companies not related to the government cannot control their risks that much. They are always expected to have some default risks. The risk-free rate term is usually related to the government securities since the highest institution as a government should take control of those macro-risks that even conglomerates cannot. Although, there are two reasons which assault the assumption of risk-free rate. Firstly, the government might refuse to meet its obligations on the bonds, especially granted in the foreign currency. Secondly, there is a reinvestment risk involved which means that any further investments after first made do not guarantee the same interest rate of income. This influences the price of your asset to fall and rise. So, it varies your profit from selling the asset before its expiration. [1] The risk-free rate is in common equal to a ten-year government bond. According to the country where the investment is being made, the rate is not similar. It also should reflect the 5 time period. Anyways, analysts tend to use just the rate of a governmental 10-year bond for convenience purposes. [7]

1.5 Equity Risk Premium In comparison to any risk-free rate asset, the equity asset includes possible risks to an investor that is willing to hold it. The equity risk premium is the price which is paid to the holder to compensate the risk is called premium or equity risk premium. The amount of this return depends on the future cash flows of the selected company and calculated on the information available. However, it does not mean that investors can not investigate the risks of the company and include them into helpful models. Exactly what we are going to do in the future chapters. The equity risk premium is one of the two figures to find the return on equity. Another one is the current expected risk-free return, which is basically the sum that has is expected from the asset without the risk.

[Required return on equity = Current expected risk-free return + Equity risk premium]

Although, such an important figure can hardly be accurately measured. Relying on personal expectations from the asset return, it leads to different estimations of the asset by different analysts. Mainly, in our research, we will use ERP in the capital asset pricing model, so-called CAPM. [3] In the estimation of equity risk premium, there are several methods used. The first one is historical. It relies on the mean of returns provided by the company for a certain period of time. Such estimation is great to use in branches with no intensive growth or fall. Where there are no expected changes to happen. On the other hand, the second approach is called forward- looking estimation, which mainly based on expert analysis. For sure, such figures can be variable and differ from historical method radically, especially if there are going to be any development sharp turns in future. It happens so because this method relies vastly on the analysts’ estimates and field of knowledge. The third, the most commonly used method, was derived by Myron J. Gordon and named after (Gordon growth model). It is also known as Dividend discount model (DDM). It is now being widely used as a reliable instrument for the developed and mature equity markets. [3] The detailed description of such an important method will be described further.

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1.6 Dividend Discount Model

As it was previously discussed, the dividend discount model which is also known as Gordon model and named after one of the two inventors is commonly used on the well- sustained markets as United Kingdom, North America, Eurozone. [3] Nevertheless, it is not restricted to use only in that type of market. Therefore, we would also use it in our analysis on the China market which is to some extent could be considered as a developed market. It is used in the computation of a Company's Stock Price. This model was initially developed from out the current value of dividend payments discontinuation in discrete time. [8]

[GGM equity risk premium estimate =Dividend yield on the index based on year-ahead aggregate forecasted dividends and aggregate market value +Consensus long-term earnings growth rate -Current long-term government bond yield]

The model is used for forecasting the price. The idea of the following formula comes from the assumption that the future value of the stake is based on the future dividend payments along with the current price value. It ignores the market conditions for the reasons of simplicity and sets the objectives to focus on the company’s financial reflection of the market. [9] Therefore, we can basically conclude that this model has a defect from the side of calculating the market risks that every company concern parallel to its activity.

1.7 Capital Asset Pricing Model

The well-known model that is widely used to describe the expected rate of return on equity. One of three methods among the multifactor model and build-up method that is used to evaluate equity return. The model is beloved for its fairly true and objective results along with simplicity in the estimation of equity. The key assumption of the model is that by evaluating the asset we measure not the risk of only this asset but also the risk of the market in whole and its connection to the asset, including the systematic risk. The CAPM model consists of three main figures: The first one is the current expected risk-free return, or in other words the zero investment risk. This is summed to the rate that describes the risk of the asset. Which, in its turn, is a beta multiplied by the premium for the risk. Coming to conclusion, the premium for the risk is viewed as a difference

7 of return that is expected on the average through whole the market and same risk-free weight of asset. This is the CAPM formula that will be used in the following investigation:

E(ri) = Expected return on a security rf = Risk-free rate βi = Beta of the asset E(Rm) = Expected return of the market Previously we have discussed the risk-free rate and the beta of the asset. Thus, there is only one figure that needs to be cleared out. The expected return on the market is usually measured as a mean of a branch of assets on the market is taken as a historical mean. However, analysts can also try to predict it for the future period in order to match it to the calculation. But it is not recommended to stick off it much. The expected return should be higher for a no-risk rate in order for an investor to be paid for the risk he takes. Generally, investors who seek the riskier investments are willing to get an appropriate premium for it. [10] CAPM model excludes the two factors that are preventing investors to diversify their risks. Firstly, it is a transaction cost. While adding new positions in their portfolio, the investor faces the additional costs that might over go the possible gain from it. For the second, it withdraws a factor of private information about the company, that individual investor can rely on while making his judgements whether the asset is undervalued. Therefore, the Model assumes that investor will continue on diversifying the risks in his portfolio, till he reaches the end number of assets on the market. This statement follows from the focus of the model and, at the same time, the key figure that it uses to evaluate the risk of the company - the Beta. [1] There are also other assumptions that do not fulfil the investor’s requirements. Such as matter of the time. The CAPM is often counted once before the investment. Recalculation of such in future will have to change the key figures such as risk-free rate that is usually taken as a price of a governmental bond. Which might change within the time period. This causes troubles in the investor's portfolio by requiring him or her to continuously diagnose his portfolio risks. [11] To sum up, The CAPM model is considered to be a default model that is easy to use in equity estimation for quick investment decisions. As an outcome, there are more complicated models that include variables to be calculated and thus provide more accurate estimations.

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1.8 Multifactor Model Due to the imperfection of the CAPM model estimation, that might not reach even a half of accurate results analytical research might consider using a Multifactor Model. The following model takes more variables into its estimation thus it is harder to use for small investments and simple private economic problems, but it is essentially helpful for deep research as it occurs to be this one. In contrast to the CAPM model that assumes only one risk factor (that is Beta Coefficient), the Multifactor models include several or more risk premiums. Risk premium are reached by multiplication of factor sensitivity and factor risk premium:

(푅푖푠푘 푃푟푒푚푖푢푚)푖 = (퐹푎푐푡표푟 푆푒푛푠푖푡푖푣푖푡푦)푖 × (퐹푎푐푡표푟 푟푖푠푘 푝푟푒푚푖푢푚)푖.

Sensitivity is reflected in a Beta of the factor and calculated holding other factors persistent.

1.9 Fama-French Model It took time till in the year 1993 two economists Eugene Fama and Kenneth French derived their formula upon CAPM that is considered to cover three main weaknesses of it. Each of these weaknesses is covered by adding a sum of two figures that are: SMB and HML. The Model consists of three main factors except for Risk Free rate. Each of it is multiplied by Beta of different risks. In total, the sum of these creates a rate of return of the Fama-French Model. Consider the following formula:

It is visible that there is a sum of four figures. Let us put them in order: ● 푅푓, the Risk Free rate we have already previously discussed. ● 퐾푚 − 푅푓, which stands for the equity risk premium, is calculated by taking records of one-month T-bill rate. It is typically the same as in the CAPM model. In total with 푅푓, it is clear from where the Three Factor Model came from. ● 푆푀퐵 is an abbreviation for Small Minus Big in the meaning of market capitalization. To find it out we are taking two sets of three portfolios and their averages. Afterwards, as the name of the figure calls out we take a difference between small-cap portfolios and large-cap portfolios. As a result, SMB is the small-cap return premium. ● And finally, 퐻푀퐿, in other words, is high minus low. Similarly to the previous, the figure describes a difference between high book-to-market portfolios and low book-to- market portfolios. So, it is generalised as a value return premium.

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The following model uses two Betas that differ from the market Beta shown in the CAPM Model. The Beta of size and Beta of value both are expected to be positive numbers over zero. In case when an investor takes small market capitalisation with cheaper cost of shares than their stock value both values of Betas are expected to be higher than zero. Thus, the neutral value is 0, not 1, as it could be seen in market Beta. [Pinto] The Model came out from CAPM when two kinds of research got noticed the relationship between different market portfolios. Eugene F. Fama on their mutual forum speak out about it so: “I talked with Client Insights host Dan Richards about the problems with the Capital Asset Pricing Model (CAPM) and the development of the Fama/French three-factor model as a more accurate way of determining how average returns differ from one another. I also explain why higher expected returns for small and value stocks should persist.” [12] The Fama-French Model, also known as the Three Factor Model, uses a historical method of presenting the equity value of the company. Thus, it is rather not to be used as an instrument to predict future market returns. Even Eugene F. Fama and Kenneth R. French by themselves prevent from using their model for such intentions. The other valuable recommendation for anyone who is going to rely on the Three Factor Model is to keep in head that model is more suitable for diversified portfolios. Due to its value-growth factor that instantly adjusting to the market volatilities, the Model is able to give high accuracy results for investors. [12] One of the advantages that occur to be weakness simultaneously of the Fama-French model is its SMB and HML values that are calculated regarding the market records and information. On one side, it is a great step to characterise and evaluate companies own size and value. On the flip side, small companies might not be willing to present themselves on the competitive market opening private information to the public; in addition, large companies might use different sorts of depreciation on prices to expose financial distress. However, it is believed that those risks are often reflected in the systematic risk as a rise of risk premium size. [3]

1.10 Weighted Average Cost of Capital The major relevance of Weighted Average Cost of Capital is in its ability to measure the impact of all types of stocks including preferred stocks, bonds or common stocks into the calculation of the company’s cost of capital. It uses a present value model, also known as the NPV model, to estimate each part of company’s capital structure. The idea of WACC dedicates to the company’s ability to cope with their borrowings and produce a valuable product. In case, that company produces less then grows its debt analyst 10 that calculates companies weighted average cost of capital immediately observes the growth of models result. This model is built such a way: the higher result is, less likely that it creates its own value. [13] It comes clear why it appears to be this way by WACC calculation formula: WACC = (E/V x Re) + ((D/V x Rd) x (1 – T)) E - equity market price of the company D - debt market price of the company V - total market value; the sum of E and D (E+D=V) Re - the cost of equity Rd - the cost of debt E/V - the percentage of financing of equity D/V - the percentage of financing of debt Tc - Tax rate As the name of Weighted Average Cost of Capital calls the formula above could be interpreted as a sum of the cost of equity and cost of debt. To be more specific, the cost of the debt should be an after-taxation value (let us discuss a reason further). The formula that we observed can be divided into two parts by the sign of plus (“+”). First one, [ (E/V x Re) ] describes the Cost of equity, and the second, [(D/V x Rd) x (1 – T)] is by means Cost of the debt. As we have previously discussed, the Cost of equity could be found using a CAPM formula [Re = Rf + β × (Rm-Rf)] that involves the compensation for the risk of the investment in stocks. Next, the multiplication of Cost of the Debt, Debt part in % of capital structure, the yield on preferred stock to its proportion and tax rate. [CFI] All the figures could be found easily in the company’s annual report. Then, mind the taxless included. The WACC could also be called after-tax weighted average cost of capital by virtue of adjustments to the pretax rate rd. It indicated that only corporate taxes are considered. The one interest of investors is in it - they want to meet solely tax-deductible payments in compounding their returns. The equity costs are not meant to be in charge of taxation, thus we should make distributions only to debt costs part of the equation. In other words, we are going to use the marginal tax rate instead of present effective rate. It occurs to be so on behalf of nonrecurring items. Statistically, marginal tax rates capital is more appropriate to in terms of future returns calculation. [3] Through time, the structure of the capital might change. The previous calculations are no more valuable and should be recalculated all over. In this case, some finalists may consider using target weights. These are the sum of expectations of analysts as well as investors about

11 future target capital structure. Including these alterations into formula should higher the chance to get accurate results. [3] Looking back on the first few notes, WACC could be also understood as simply the opportunity cost of investors who input their financial instruments in the company. The reason is that WACC reflects the returns that both equity owners and lenders are concerned to receive. Generally, WACC is used by equity and debt owners of the firm not alone, but also by heads and managers of the firm to observe and estimate their financial results, build the strategy. This figure basically shows the required return on the firm, therefore it is also meant to be used as a discount factor of the future cash flows keeping in head the risk that it remains stable over time. However, it is a risk that any model faces either. To point out even in a simpler way to understand the model, we should look at a company as a pound or a pool of two streams pouring into - equity and debt. Operating earnings are not included by the terms of them paying off the borrowings to the lenders and dividends to stockholders. In the end, the figure that comes out is how the company proceeds these streams to other directions and copes with debts and paying off securities. [13]

1.11 Industry Analysis. Porter’s “Five Forces” The Porter Five Forces Framework is an instrument to understand the attractiveness of a company that leads to profitability on the basis of industrial organization economics. Michael Eugene Porter has created and firstly published his article named “How Competitive Forces Shape Strategy” in “Harvard Business Review” in 1979. [14] His idea came from out imperfection to Porter’s mind of SWOT analysis of strengths/weaknesses /opportunities/threats of companies. He had problems in describing for students the company’s strategy from the point of view of one company as this model does. Thus and so he decided on the creation of a framework that will help strategically describe the company’s fields that influence on its revenues and opportunities to gain profit. [15] By proceeding connection from the micro level of investigating each firm (a reference to SWOT) to macro-level of industry influence on each one, Porter has described success and losses of majority companies. However, this should not follow to succeeding the most total and accurate results. Any company is able to overcome “the forces” by its competence, innovativeness, hardworking or any other issue. By these criteria, it is possible to gain above average profit or even create a new niche (a reference to a “Blue Ocean Strategy”) [16]. The following forces could be divided into two groups. To the first, it is horizontal competition: the threat of substitute, the threat of established rivals, and the threat of new entrants. It is influenced by the same level of threats - the same companies as yours compete 12 for the customer. To the second, it is vertical competition: bargaining power of suppliers and the bargaining power of customers. These are two forces that influence the company from both sides of goods production - input and output of products and services. Let us put them in order and explain in details: ● The threat of new entrants. There is always a thread of new competitors upcoming on the market. A new company can switch the attention of the public and withdraw your customers, not only by creating a better product but simply giving them an alternative to choose. Even being worse in service or product development they might take part in new customers who still cannot differentiate products or services quality in the short run. Of course, it gets tough even in the long run if our firm cannot cope with the quality of goods supplied by newcomer competitors. ● The threat of substitutes. For certain, even already existing companies create pressure on the company, in the case when they create similar by characteristics product which it might be cheaper or easier in usage. Although commonly, substitutes appear within competitors’ innovations there is also a chance that other companies outside the sphere or even industry of selected company can produce substitutional commodities. For instance, by extending features of one product it might exclude demand in other. ● Competitive rivalry. As an outcome of two above, this force unites both of them and gives other reasons for rearranging companies impact and revenue in the selected industry. It includes strategic power of the company, its ability to cover the market by new product and expenses on an advertisement which, contribute to knowing the product, innovation strategy. The idea is in how a company by itself is adapting to the changes in the industry and competent for dealing its business. From my perspective, it is the key point for any start-up company that enters the market, and also a point of an investor to pay attention to while making investments into new companies. ● Bargaining power of customers. Concerning the substitutions that are existing on the market, the selected company might vary its prices without losing the number of purchases. The more substitutions existing, the easier for customers to change their choice from one product to other. There is always existing an extent to which customer is able to continue buying a product while growing prices. Having this extend high, uncovers company more power. ● Bargaining power of suppliers. Each company is to some extent dependant on sources that are used in its production of any good. It might be less - as farmers, or more - importers, for instance. However, this ratio determines the risk of the company be forced

13 to buy at higher prices, therefore, lower its revenues. This is a factor that some companies are facing continuously at the risk of shutting down their production. For this reason, it is necessary to exclude it by finding new companies, founding their own, or what usually large firms do - buying their supplier firms.

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PART 3. ANALYSIS OF THE ONLINE-BASED TECHNOLOGY INDUSTRY WITH RESPECT TO THE ANALYZED COMPANY By origin, the industry analysis begins with key outlines of the industry features that select it among others. The analyst should briefly overview the historical background that formed the industry development, define the geographical area, and products served within this industry; by the flow of description to add references about the company activity in the investigated industry. However, the principal feature of the analyzed company has influenced the research to change its perspective and to begin with a description of the company itself. The reason of it is uncovered below.

3.1 Tencent company The investigated company has been established in Chinese tech-growing town Shenzen in 1998 by Ma Huateng and four of other co-founders. Currently, the founder of the large conglomerate is recognized to be the 2nd richest people in China and the 9th worldwide, ahead of both Google founders Larry Page and Sergey Brin (by Forbes). His company was established for covering a market gap of required internet-cafes that were fast growing in demand for that time. It was supplying the products of text messaging - “QQ chat”. Despite the fact, that popularity of QQ was growing the company has been unprofitable for the next three years. After 2000, when it started to invest into other branches as search engine “Soso” and online-gaming as “Crossfire” and “Dungeon Fighter Online” it is has grown exponentially. [17] [18] To my mind, the genius of the company’s heads has uncovered themselves already by that time. Within three first years of growth, remaining no revenue but pouring it into investment capital to finally purchase several other companies seems to me a reason. In addition, to prove it, we can simply look forward into the history of investments made by Tencent. In the year 2004, Tencent went public on the Hong Kong Stock Exchange. And afterwards chained to Hang Seng Index Constituent Stock in 2008. [19] During these years, it continued on working on their business by licensing their products and creating a Logo patent for Penguin, and expanding their online-gaming products [20] Their success was incredible - the cost of their stocks have increased from $1 in 2005 to approx. $460 by the beginning of 2008. [21] The greatness of it is due to its monetization system in QQ services. It offered consumers to buy exactly anything they would like to. This has a negative effect on contrast. By increasing game transactions, gamers real impact in game decreases and allows less competent in games

15 people to benefit. Nonetheless, it worked on behalf of their orientation, not for gamers, but for the masses - working society, those who have less time to develop in their game skills, instead of purchasing power. As an evidence of it, hereby we put the quote of Steve Gray who left the higher position in Electronic Arts to join Tencent team in 2009: “I’d say the secret sauce of Tencent is in its customer service and operations,” he says. “You can have millions of people playing the same game, and it works.” [20] Starting from the year 2011, the company made a great investigation by purchasing two main games that have rolled their revenues out: The Riot Games the game “League of Legends” with their massive online-gaming auditory. Tencent purchased the minority stakes of Epic Games and Activision Blizzard - the companies who own franchises for “Gears of War’, “Overwatch”, “Destiny”. It continued working on their investments projects buying Chinese companies and at the beginning of 2014, they bought 15% of stocks in JD.com Inc. which provides e-commerce services. Managers of Tencent decided to combine several other of smaller projects as PaiPai, QQ Wanggou and Yixun to JD.com and to become a huge competitor to Alibaba Group. [22] In two years after (2016), Tencent has prepared US$8.6 billion to make another large investment into Supercell company and own 84.3% of them acquire. The company, which owns one of the most popular and blooming projects of smartphone online “Clash of Clans”. [23] On the edge of everything, it has poured its investments into founding an electric-car startup Future Mobility together with Foxconn and a year after (in 2017) buying 5 % of Tesla stocks for US$1.78 billion. [24] [25] By the end of the year, they have extended their “portfolio” by adding 12% stocks of Snap Inc. the owners of SnapChat label [27] and exchanged 10% of Spotify the one of the largest music retailer to their Tencent Music Entertainment (TME) with intent to continue “strategic collaboration” [28] [29] The year before the moment of writing this work they have agreed on cooperation with “The Lego Group” to produce online-games aimed at children category. [30] [31] Further, buying a minority stakes in “Skydance Media” film studio that works in collaboration with “Paramount Pictures” and “Warner Bros. Pictures”. [32] After, they invested into 5% of “Ubisoft” through “Vivendi SA” - one of their rivals in the gaming industry [33] and in a short time later secured majority in “Grinding Gear Games” which has developed “Path of Exile” [34] [35] Advancing their progress, Tencent Group has continued on making investments in covering different spheres of interests - advertising, social media, online gaming, e-commerce, and even artificial intelligence within other high-end technologies. However, their main

16 interests in business create a special area where every company and no one by themselves is a competitor to Tencent. This is how we describe the online-based technology industry.

Image 1: The company’s structure

Source: Tencent’s official website Nowadays, the company has grown into a conglomerate and divided itself into six different branches that take control of subsidiaries and others. This graph gives us a general understanding of how diversified the company is. [36] While doing analysis on the industry performance, the very first thing to pull your attention to is the market observed. While analyzing the market of Europe having nicely high revenues and performing growth, in contrast, the market of China might have no interest in the same product due to a variety of reasons as its own substitutes or cultural differences in way of living. Concerning this and other reasons, companies use different approaches and instruments to engage customer’s interests. Also to mention different legal bases of countries that IT companies in common face while transferring their products for other markets. This issue is worthy of its own topic, however, we will discuss it in further problematics in the draft. Before getting to the main vectors of company’s activity it is essential to look at the specific features of the market of origin. Moreover, speaking of a country like China, it is impossible to ignore its socialist system and the perfect distinction from the Western-European model. Since the company being investigated is subject to the laws and the legal basis of China, it will inevitably affect the development aspect of the Internet in the country of the enterprise. 3.2. China’s e-commerce success While in the year of 1999 in the United States of America 50 computers by statistical accounts were available to 100 people living there, in China only 1 computer was supplied to 100 of citizens. This lead to the situation when Chinese people first became acquainted with the internet not within computer but smartphones already. [37] The internet usage has grown mildly from the year 2000 but it took off from 2006 rapidly. Already by 2013 almost half of the population was supported by the internet (45,8%). While in the United States it has been 84,5%

17 high. Obviously, there has been a gap that the Chinese government considered to cover in its “plan”. The real support to Chinese IT sphere was provided by The Communist Party of China within the 12th five-year plan from the year 2011 to 2015. Just by the time of creating a WeChat the policy of involving people to proceed online purchases and use e-commerce and connecting their information to official accounts started. So the plan included following: increasing GDP by 8 per cent and establishing the lower prices for living, controlling the growth of population under 1.39 billion people, implementing prudent monetary policy and levelling up infrastructure services as building 45,000 km high-speed railways and reaching the length of highway networks by 83,000 km. [38] As we described above, the Chinese government provided Tencent support by allowing to connect different institutional services and helping to increase e-commerce by the means of rising economical GDP within. 1 billion of US dollars (6,5 billion RMB) was invested in the e-commercial environment to support the tendency of Chinese shopping. It gave a great advantage not only to Tencent but to its other competitors in e-commercial business as Alibaba. As we can see from the graph, then the increase of e- commerce in China has been increasing steadily and continuously, holding the same level not only in the beginning but also within the five-year plan period.

Graph 1: China e-commerce market gross merchandise value (GMV), 2009-2016

Source: iResearch Group In comparison to the USA, Chinese growth has surpassed Americans already in 2013 by both business-to-customer and customers-to-customer’s services online.

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Graph 2: Value of e-commerce transactions (in billion USD)]

Source: Industry Report. E-commerce in China The popularity of mobile purchasing that is also called - “m-commerce” (concerning mobile e-commerce), in undoubtedly. By the current data provided by Hootsuite by the beginning of the year 2019, among all internet users in China, 97% was using it connecting through mobile internet and 74% of them have ever bought any goods online. Whereas, in US market this number falls to 54% smartphone internet users. [39] Image 2: Device usage and e-commerce growth in China for January 2019

Source: HootSuite and We Are Social Industry Report As the founder of Alibaba, Jack Ma once outlined: “In other countries, e-commerce is a way to shop, in China it is a lifestyle”. And great giants of China have raised this idea carefully and dedicated all efforts to it. The results are illustrated on the charts. [40]

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Graph 3: 98% of Chinese Internet Users are Mobile; number of internet users in China in million

Source: Forbes with Statista By the year of 2015, above 690 millions of people have been using the internet within the selected country, and 610 million of them connected to it through their smartphones, which gives us 88%. To contrast, that number has increased up to 98% by the ear of 2018. At the moment, 788 million people of China that are connected to the internet getting it through mobile internet. [41] This proves that despite the low support by computers in China, in the 21st century the number of smartphones grows rapidly. The next step, according to governmental plan, is to deliver 3G and 4G mobile internet accessibility to over 85% of the population of the country which is 1,364 billion of people by the end of the thirteenth five-year plan (2015-2020).

3.3 WeChat Worldwide Tencent is known firstly from the messenger application WeChat that came out in 2011. It has another name for the China market - Weixin. It was created on behalf of the dispute QQ messenger, the previous product of Tencent and Chinese anti-virus company Qihoo 360 in 2010. Using the method of virtual currency payments to make purchases within this app QQ has gained huge popularity that has reached a macro level - when their QQ Coin was equalled to the national. The Qihoo 360 abused QQ about scanning private information like contacts of users and uploading them on QQ servers. By that time, it was a real issue, however nowadays by signing an agreement people allow messengers and other programs to do it willingly. In return, QQ accused them to be a malware* and restricted users to download this application. By the influence of the Ministry of Industry and Information, they are being forced to come to an agreement.[42] The QQ messenger still exists on the Chinese market but is almost unknown outside of it. In contrast, WeChat has been advertised even outside and has gained some popularity due to incredible success in China. 20

There is a real difference between WeChat that people use outside China and inside of it. For people around the Socialistic Country WeChat is known as a messenger with not a lot of features and not real popularity among social groups. Messenger settles most of their connection point within China market so it is pointless for users of other countries to use its services. In such perspective, it’s competitors as Messenger powered by massive giant Facebook, WhatsApp, Viber or other applications that allow message sending but not initially created for this as Instagram or Snapchat are more powerful competitors. On the other hand, it is simply another thing while talking about Chinese WeChat - Weixin. It has broadened the variety of functions and continues on including. It allows not only to message, but also to create official accounts, share “Moments”*; use an advanced search for friends as Facebook; read the news or use the searching tool as Google does; in 2016 users could start calling outside the messengers app to other phone numbers by using VOIP* of WeChat Out as “Skype”; [43] use its own payment system WeChat Pay [44]; to view the map of hot transportation spots by Heat Map that was initially used by government; [45]; to organize virtual space for communication in business by Enterprise WeChat; [46][47] in 2015 is connected to 27 cities of China to provide City Services as booking a doctors meeting or paying electricity fees and not only; [48][49] lastly launching a WeChat mini program that allows users to download only the minor part of the whole program into WeChat to save the memory storage usage. [50] Taking each of these functions into consideration, we could obviously find different competitors to it. For instance, for the WeChat Enterprise, there is an analogy of a Slack application; or Apple Pay as a competitor to WeChat Pay. There is also another great competitor for WeChat Pay on its own market - AliPay, although we will get to it later on. Contrary to that there are such functions as Heat Map or City Services that could not be realised in outside of the People’s Republic of China. This is the feature that became available due to the cooperation of the government and giving a hand to IT sphere and connecting society to online within a “Five Year Plan”. The decisive figure to judge most of the social networks is far not the registered user accounts. In view of massive using several networks, when a certain person would register multiple accounts it is no more valuable criteria. Nowadays, what matters is a time that a person spends on actively using a certain social network. In such concerns, developers use “monthly active users” quantity. For WeChat it is going to be following.

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Graph 4: WeChat monthly active users

Source: Statista [51] Comparing WeChat to its closest competitors as Messenger and WhatsUp, by the number of active monthly users, WeChat looks less attractive. It results from typical WeChat politics to hold its users on the Chinese market and integrating the markets with high potential. While Messenger is the main Facebook app, WeChat could be compared to Facebook itself as a social network. It is not popular worldwide due to providing the key advantage features on their main market. Abroad, people know it due to the mainly Chinese usage in business-related features. By the data provided by Technode [52], most of the users of Weixin are in the business group - 31.9%. Graph 5: WeChat users by occupation

Source: Tencent Tech. Trnaslation by Grata Chinese people drop using e-mails messages however instead - WeChat. The injunction against Facebook according to the Chinese laws and accessibility of WeChat Enterprise facility instead stimulates continue practicing this activity.

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Graph 6: Monthly Active Users by Social Platform on January 2019

Source: Hootsuite and We Are Social report industry report The next chart describes the penetration of different messengers into the culture of messengers by the countries. Image 3: Top Social Messengers Around the World in January 2019

Source: We Are Social/ Hootsuite [53] Visually, the WhatsUp messenger is covering large territory by implementing into various countries. However, it is not the highest monthly usage according to data shown before. In addition, concerning the next two diagrams, we are able to notice a large difference between the usage of internet in certain regions and social acceptance of the messengers.

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Image 4: Internet penetration by region (large number), Social Media penetration by region (smaller number)

Source: Hootsuite and We Are Social Annual report Upon this information, we conclude that a great advantage of Facebook Messenger is in its natural implementation with social network Facebook. WhatsUp, in its turn, covers countries with moderately low internet and social network penetration. WeChat is deeply concentrated on the Chinese market and still has a gap of the population to cover. The interesting fact, The Eastern Region, China, in fact, is the only country that has reached 70% of penetration of Social networks having only 60% of internet users. Concerning almost monopoly on the market, this was reached by the Tencent messengers QQ and Weixin. In comparison, the same level of social network usage is dedicated to US North region. However, the overall internet popularity has reached a higher plan of 95% which is decidedly more than 60%. This correlates with a mentioned fact - Chinese people at first got acquainted with internet through smartphones by using Weixin application. On the other side of the coin, WeChat popularity among other countries has less spread. It has most of its servers settled in China. This means, that two people using it in Europe, for example, might face connectivity problems or even strong censorship according to the Chinese laws. [54] The censorship keywords have been investigated by Citizen Lab with an experimental method and gave an approximate understanding of how it works. For example, users of WeChat would not have the possibility to talk freely about “June 4”. [55] Despite the matter of the facts, comparing it to WhatsUp it has some advantages as not required sim-card and possibility to use Facebook account to log in. [56]

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On behalf of multiple advantages for Chinese users and historical issues described above in Chinese success, Tencent has gained the most auditory in the place of origin, by its two most developed platforms QQ and WeChat.

Graph 7: Most Active Social Media Platforms; Percentage of internet users who report using each platform (survey based), internet users within 16 to 44 years’ old

Social: Global Web index [Q2&Q3 2018] perfirmed by Hootsuite and We Are Social Generalizing the competitors, we may outline that WeChat has certain features that enabling even more services to Chinese users than its competitors on other markets. Upon this, we may conclude that while other markets have a variety of different supplied products and companies, WeChat gathers everything in one and offers users even more. Logically, it would reasonable also to compare its various advantages with other social networks like Instagram or Vimeo. However, due to market distinctions, such investigation is pointless. “Quite frankly, the trope that China copies the U.S. hasn’t been true for years, and in mobile, it’s the opposite: The U.S. often copies China,” said Ben Thompson to The New York Times.[57][58] During the summer of 2018, the President of Online Media Business and Senior Executive Vice President Seng Yee Lau has concluded about intentions of Tencent to enter other markets with WeChat product: “People ask, when are we bringing WeChat to different countries,” he told Reuters. “Our answer has always been, for any digital services or products, ... if they have a better way of meeting the needs of the local customers, then they have a basis to be in there. “If they haven’t figured out a way to be a better alternative then we have no basis of being there.” [59] Therefore, Tencent has stated its position about implementing its services to other markets from beginning to end: unless there is an existing demand in such product the company shall not enter the “red ocean”. [16]

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3.4 Chinese model Just a year ago, in January of 2018 Tencent has surpassed the Facebook company to become the most valuable social network, holding a $540 US billion. Since the popularization of television in Europe and American regions, people became devoted to the only one type of revenue possible to engage from the entertainment industry. This behaviour has been not betrayed for years and nowadays, we observe the situation when playing, messaging or watching any visualized content is a tough time to spend at least 10% of it to advertisements. To get a better understanding of how much we are into this system, just take a look at the Facebooks income states. At least 95% each year the great social network giant receives from ads viewed by the million auditoria. In the year 2017, it has reached 98% in comparison to the year 2012 when it hit only 84%. The else methods of involving financial sources dipped (from $181 million a year to $175 millions). [60] Graph 8: Revenue of Face book in month from 2016 to 2018 years

Source: Facebook annual report 2018 On the contrast, the states of Tencent’s income from products and services differs a lot. Tencent refuses to continue engaging profits from putting more ads into their services and betray the consumer’s loyalty. Instead of this, they have reached even higher revenues by offering consumers value-added services. By value added services, is meant the additional customization services that allow users to single out their identity through visualized features. It is often not affecting any activity in social or gameplay, but not always. In other words, customization of an online game avatar with clothing or makeup or buying special music packs, and wallpapers. Such feature was firstly used by Tencent through QQ messenger and then transferred to Weixin official accounts. While

26 in games it has been using it from the very beginning and until now. Bellow, we will outline this method used in games on behalf of the American Riot Games and Epic Games. From the view of our companies, such transactions are unreliable and look silly, due to unstable revenue incomes. Whereas, by signing up the contract with advertising company the subject would gain reliable income, payments made by users of the product motivated by just outstanding of the crowd seems uncertain. However, from the psychological point of view, it is already proven in practice that willingness to differentiate your identity in the internet world has becoming appreciated by others within the growth of the internet usage. Once the user has made an online payment, higher chances of proceeding it in future also. Using this method, Tencent gets most of is revenues from WeChat for instance, having 69% of income due to virtual-added products purchases. On the contrast to Facebook, its online advertisement hardly reaches the ⅕ part of whole revenue statement (18%).

Graph 9: WeChat revenues by types

Source: WalkTheChat.com The key difference and also the main problem that any company would face trying to engage this type of profit is how attractive and involving the process of using the application is. Strictly speaking, the game or social media surfing should give customers high-quality product to hold its attention for longer period. The decisive point of a customer to pay for value- added services is the time he or she spends in the online application. “Once users are hooked on a popular game, Tencent then persuades them to pay for “value-added services” such as fancy weapons, snazzy costumes for their avatars and online VIP rooms” refers the Economist. [61] On the example of the developers of the League of Legends - The Riot Games, and the Fortnite - The Epic Games about whom we are going to follow the topic in the next subchapter, 27 we will show how this model is easily applicable to the American and European contingent. Both of the companies have chosen a strategy of free-to-play concept against their direct competitors on the same market: DotA addition for the play-to-play (p2p) Warcraft III versus League of Legends (LOL) and the p2p PlayerUnknown's BattleGrounds (PUBG) versus free- to-play Fortnite. According to the history, DotA addition was available as a sub product of Warcraft III for some time until the after the great success of League of Legends has shown that it is possible to create a separate project. LOL provides users an involving (hard to reach a proficiency) and time-consuming (on average one session lasts 30 min). As we previously discussed, time - is an essential part to encourage people invest in the project. It had the booming effect on the market and was on the top by the revenues on the market. During the year 2017 Riot Games reported highest revenue on the market - $2.1 billion; the year 2018 dipped on the third place (still remaining high) with $1.4. Such decrease was caused by Epic Games hit-season game that influenced the whole entertaining market [62]. The Fortnite came after the huge success of an experiment of the Battlefield creating a royal game. The history made around - the popularity of the project was framed by the possibilities to buy the game before starting to play. Upon its success, Epic Games released a free-to-play project Fortnite with the same features but simpler graphics, which lured gamers not involved into realism of Battlefield to try Fortnite. From the start in 2018 it took the first positions of charts by revenues having $2.4 billion and popularity although being f2p game. (the information provided here will be shown in the following chapters being more relevant to the Tencent Games topic). All above all, consider the fact that two successful models shown above are fully or majority owned by the spoken company. Thus, we have a great example to follow. Back to the question of Social network comparison, the following chart shows the real difference between two giants.

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Graph 10: How China’s Social Media Giant Compares to Facebook

Source: Statista Despite being on the lower positions by the monthly active users (MAU) statistics world-wide, Tencent holds the same level of revenues comparing it to Facebook. Such a difference might be caused by the two reasons. To the first, by the sum of several monthly active users of different networks it could be compared to the amount of Facebook’s Messenger MAU having 1,369.04 millions of users active. However, it is still far from Facebook’s network. To the second, it proves principal that Tencent uses for monetization of its services which is fully described and shown above.

3.5 Tencent Games Not the last thing to mention, that Tencent’s largest profit gains is provided by this part of the company - around 40% of whole revenue accounts (deeper look will be concerned in future chapters). Nowadays, Tencent Games are concerned to be the largest gaming company in the world. Its revenues compared to others it rakes billions with positive growth rate. Taking on more and more games in own portfolio Tencent builds a culture of gaming by themselves. Whereas messenger WeChat is vastly oriented on one part of the world, precisely the Game part of the company has been taking millions even abroad. Therefore, we will take a look on establishment and further companies moves that has boosted this branch. Let us draw attention especially to the ways and policy of the company concerning customer’s transactions and payment system in the Chinese model. This part of the company from its establishment in 2003 till now holds its main focus on distributing online-games. In 2004 basing on the messenger QQ platform their first product was called QQ Tang. Soon after Dungeon Fighter Online was added to the QQ Games and

29 created a booming effect which is continuing even now (more information will be considered below). Afterwards, it continued on summing games on their platform: QQ Fantasy - online game based on Chinese mythology, QQ Huaxia - online RPG, QQ Nanaimo - RPG based on Three Kingdoms period, QQ Dancer - an online rhythm game, QQ Nanaimo - online pet simulator on the abandoned island, QQ Speed - online racer game, QQ R2Beat - online skating game, QQ Tang - RPG with history based upon Chinese literature, QQ PET - pet holder desktop simulator. [17] The most of the games were presented on the Tencent Gaming Platform on the Chinese market only. In 2007 all games and many others conferred in QQ messenger have been opened on the internet service QQ Games: www.qqgame.qq.com. [64] The Tencent America subsidiary company has translated most of the games to US market and the service has been opened for seven years till The QQ Games Support Team has made on decision to close its service due to less popularity of games of the type flash. The US market has begun its development earlier years than China, therefore, market was already overcrowded. As it was already stated, Tencent directors are carefully investigating the market possibilities and precisely looking for gaps to expand. Later on in 2017 they have announced about rebranding of their Gaming Platform. The new source is called WeGame and it is available to international market. [66] Recently, the WeGame X platform launched. It has been created targeting for abroad community. Although being in the early access only its servers are settled in Hong Kong and the number of gamers using it gets over 200 million. It counts around 20 games. This is a good start for just established source. [67] Returning to the Tencent Gaming portfolio. During next year from 2007 it has been accumulating its finances with purpose on further investments and leading agreements on cooperation with other companies. The greatest purchase known abroad, in my personal opinion, is Riot Games which is a unique publisher of League of Legends online multiplayer game. The following title has been published in 2009 in Los Angeles. However, company has been preparing their first and unique title for two years before. Within these two years the developers have to continue their idea realization. Partners have raised 7 million on their project. [68][69] Developers have been aiming to dematerialize the problems they concerned about other gaming companies at that time. To their mind, publishers were changing their focus from game to game rapidly and by doing that they lost the key issue - the will of fans and community point of view in the game. [70] Thus and therefore they created a company with a strong politics based on auditory

30 overview, free-to-play regime and single-aimed product - the main difference between Chinese way of return and European that we have discussed it before. Just after the League of Legends was launched several investors have invested 8 million of US dollars into the Riot Games. They were: Benchmark Capital, FirstMark Capital and of course - Tencent. [71] Already in a year, in 2010 rung up $17.25 million in revenue, as the Statista data refers. One year after they have made it four times more to $85.3 million. One of initial investors Tencent offered $400 million in early 2011 for a 93 percent stake and few years later in 2015 buying it out for an undisclosed sum. [72][73] Rioters have agreed to lead their business independently from mother organization, to what Tencent were certainly for. In further years, Riot Games becomes the most of the companies by several nominations as “The best Company to Work In’ and the “Company of the Year”. [74]. This chart shows its revenues through the 2015 -2018 years [75] in comparison to Tencent overall revenues [76] Graph 11: Riot Games revenues from 2015 to 2018 years

Source: Statista Game developers as other companies often enter various forms of running businesses. Activision Blizzard nowadays known as a leading game developer with such titles as Call of Duty, Guitar Hero, World of Warcraft, Diablo, Hearthstone and Overwatch that have become the legend. [77] Previously the company was two independent companies. While being the greatest game company in first decade of 21st century Vivendi SA had taken control of Activision and merged it with own Blizzard Entertainment dating the 8 July 2008. Vivendi took the 52% stakes. [78] By the year of 2012 company has been raising millions for its game series Call of Duty while Vivendi has was having financial problems from other side. Activision Blizzard, in its turn, was seen as an answer to its financial problems, thus in order to rescue its

31 reserves, it summed up $8.17 billion to separate from the company on July 25, 2013 [79]. At that moment, Tencent financially supported the company from the side of investment group that owns nearly 25% by now. It is reported that Tencent Holdings Limited have currently a stake of 5% in Activision Blizzard. [80] Soon after separation by the time of release of their next game Destiny company entered the fifth place by revenue in 2014 having $4.4 billion. [81]. In 2013 Tencent agreed on transferring Call of Duty release on Chinese market. The thing to mention is that on the Chinese market there was already a great competitor to that game existing, provided by Korean developer Smilegate’s - CrossFire. The official publisher of which is Tencent itself. So keeping both of the games in same portfolio, Tencent cloud have gained from it competition on the market. Same situation happens over again in future years. In 2016 they have acquainted the King Digital Entertainment best known for the free- to-play match-three puzzle game Candy Crush Saga for $5.9 billion. This purchase is seen as a great opportunity for the PC (personal computer) oriented company to enter uprising mobile market. [82] Currently, the company had experienced subsidence to almost 10% due to the split with the franchise holder of Destiny Bungie [83]. Despite that, company has a long path of tackling different obstacles that mighty will help to hold the revenue growth for these years. [83] Graph 12: Top 10 Public Companies by Game Revenues. 2014 and 2013 years

Source: New Zoo Global Games Market Report Observing the given data, we should mention Tencent being on the first position through two years as minimum bypassing Sony and Microsoft. To the current period of the company is related two games: PUBG and Fortnite. In June 2012, Tencent had invested the minority stake Epic Games that at that time was popular because of the game genre action-shooter “Gears of War” that was initially released in 32 console platform XBox. Epic Games was known especially for its Unreal Engine - the software that helps game developers to create games. According to the Epic Games CEO Tim Sweeney words they were seeking for collaboration to find an approach to Chinese gaming industry and its customers as well as move from console-oriented products to personal computers and mobile titles. [85] On the other side of the deal Tencent might have been interested in Epic Game’s in product in development the “Unreal Engine 4” that has been announced in February 2012 as "people are going to be shocked”. [86] The new advanced features that offered an Engine for gamers was far from that-days of developers abilities. In a year after, in 2013 Tencent has acquired already the 48.4% of stakes for $330 millions of dollars. According to the Tencent’s quarter and annual report of 2012, the company has been reorganized into six clusters and additional subsidiary of e-commerce focus. The investment made by Chinese conglomerate reported it as the part of investments "whose products or services are complementary to our own." With reference to Riot Games, the report mentions investment plan titled “game-related”. Another description of the issue of such investment: "Since the Group has the right to nominate directors to the board of Epic Games, Epic Games is accounted for as an associate of the Group," which is from that moment was placed into its “family”. [87] In the end of 2017, Epic Games have announced Fortnite - the most popular game of upcoming year. And already in the beginning of 2018 it had an astonishing rise topping the whole industry revenues. Graph 13: Number of players in millions of Fortnite game in period from April 2017 to June 2018

Source: Statista 2018

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The chart above represents how rapidly the population of the game outcome in profits. Such a great growth could have been reached by the competition contrast: in the year 2017 the PlayerUnknown’s Battlegrounds (PUBG) game released. The game was created on base of players modification to Battleground and caught the attention of the public. The game, developer of which is Bluehole has established the new game genre - battle-royale which is cutting the edge of popularity just at the moment of writing this Thesis. The contrast of two games lies in the two differences. Fortnite inherited the best - instructiveness, the player-contra-player (p2p) challenging experience and of course the genre of battle-royal. The first contrast concerns the availability of the game and payment system. As we have previously discussed, such involving game has all causes to inhere the value-added services. The second reason lies in readiness of people not much into games to give it a try. by virtue of the simple colorful design it widened the category of people that could simply “take one evening to play”. The reason of taking this into brackets is that by some investigation, such competitive regime might cause an addiction to play it over and over. [88] Accordingly, the interest to the game might increase from the very beginning and even take control over lives. Claims of such characteristics are not new to the Tencent Holding Limited heads. They have been already previously accused of several cases when people got too much gaming experience. Such games as Honor of Kings, Clash of Clans and League of Legends are being the interest of many medical and psychological researches trying to describe unusual behavior, stress and explosive fits of rage. Some particular announcements and articles that violate the public by claiming companies of developers in “poisoning people by their games” might adversely affect shareholders price levels. [89] By the estimations of South China Morning Press team Tencent has lost about $17.5 billion of US on Hong Kong’s trading due to the assertion of People’s Daily about negative effect of their games. Tencent react by already proven method of screen alerts when spending much time on game. To my point of view, the game developers are trying best to give people a feeling of other world living. The negative effect is just the other side of the same coin that cannot be avoided. Further awareness of some parts of society will increase proportionally to the contingent of people involved in games. In the year 2012, on the game market appeared Finnish Developer Supercell by invention made on about $8,6 billion dollars. The Supercell company has been a great complementary to the Tencent strategic development being on the top of it popularity with released in 2012 game Clash of Clans. The game was both free-to-play with various transactions and gained large popularity in by the 2015 year bein estimated as $10 billion company. Tencent acquired the majority stake of 84,3%. [90] by the moment of purchase Clash of Clans already

34 have been on the market for 4 years. Despite the fact it was not reaching higher success, in 2016 they have released a Clash Royal game that rocketed even higher reaching $1 billion revenues. [91] Graph 14: Clash Royale Cumulative Gross Revenue App Store and Google Play, Worldwide

Source: SensorTower

The Tencent Holdings are silent investors. Due to this fact, most of their investments made into small companies or those who are not up on rise might remain unnoticable as this Paradox Interactive company that has been working on series Europa Universalis and Crusader Kings. The company orients on historical grand strategy genre of games and has been working on projects chasing the quality level products. In May of the year 2016 they went trading on public IPO. [92] Just to its entrance on market the 5% stake is traded to Tencent Holdings remaining 33.3% to the chief executive officer Fredrik Wester. Apart from it, 30% stake investment joints Swedish investment house Spiltan. [93][94] In 2017 Tencent, viewing the growth of the PUBG with its developers - korean company Bluehole, started negotiation to: firstly, trying to make an investment, that was met with hostility, [95] then proceed the game to the Chinese market. [96] With a strong negotiation they have achieved their purpose to be exclusive publisher on China market with PC. [97] [98] In addition to, they have further agreed on 1,5% of stakes [99] They have also proceed negotiations to acquire its stocks to 11,5% to be the second largest shareholder after Bluehole’s founder and chairman Chang Byung-gyu with 20,6%. [100] [101][102] Continuing their partnership, Tencent and Bluehole decided to release its game on smartphones in China firstly. [103] [104] Tencent has provided several developer studios that could bring that project alive. The result had great success - 75 million pre-registrations and after taking first and second positions on Chinese IOS download charts. [105] Both on the Android and IOS the game was published free-to-play what contributed a lot. [106] 35

The game had a great advanced a lot and only in the end of 2017 overtook Dota 2, the most played game at the beginning of 2017 and surpassed its record by 1.3 million current players that were previously Dota 2’s 1.29 million in 2016. The chinese users in their turn got firstly more interested in mobile versions and then proceed to buy the game for PC’s. [107] At the juncture between PUBG and Fortnite rivalry, the Tencent Holdings have reached the balance to gain from both projects, especially in China market. While Fortnite having 40% stake in Fortnite developer company and partnering with PUBG to make a mobile version they have supported market competition. Recalling back to Call of Duty and CrossFire example, Tencent positioned itself the way it can profit from both of titles. [108] Currently, the PUBG Mobile has been estimated to upraise by 24% in December with the sum of $45.2 million income by the players' expenditures in IOS Store and Android market. In contrast to Fortnite, that has dipped 45% from December in IOS that results in $37.9[V] By the opinions of journalist such a drop could be caused by holidays expenditures that are more affected by various auditory of Fortnite than Battlefield. [109] However, keeping on an investigation there is another factor highly involved in this. Silently, on the market appeared Tencent Gaming Buddy launcher that allowed millions of PC users to try the mobile free version of the PUBG. It is still gaining popularity and continue adding other features. However, such possibility has proceeded to PC users who wanted to try mobile gaming but for any of reasons could not, to try playing it on their computers. [110] In 2018 the game market has experienced the growth never seen before. $134,9 billion has gained game developers on accounts. Generally, the game market rose by 10,9%, however, the half of the revenues concerned are dedicated to mobile segment that has been experiencing the growth up to 36%. [111]

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Graph 15: Global Games Market Value 2018

Source: Game Industry Biz and NewZoo The current Graph shows the huge penetration of the mobile market of games in the industry. We can observe that mobile game users are reaching 47% of the revenues on the game market. From this statement follows that Tencent’s primal strategy has even more potential to cover. On the other hand, Personal Computer and Console gaming are still taking quite huge part of the markets revenues. Analyzing the factors mentioned previously and the charts following here we conclude about strong influence of the PUBG and Fortnite competition impact on such an ascend. These two tabes bellow describe fully how much the Chinese giant is involved into the gaming industry. Table 1: Top free-to play games by revenue in the first quarter of 2018

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Source: Superdata Here the graph shows the publishers that have gained from their games as the most in the industry. We can observe that Tencent has direct income from three of most popular games of the world in 2018. Now, let us take a dipper look at partial owning and investments of Tencent bellow. Table 2: Global PC Game and China IOS Store Rankings (July 2018)

Source: NewZoo The current table illustrates that Tencent has even more influence on the game industry connecting to the most successful publishers in the world. Seven out of ten games from worldwide statistics and six out of ten in Chinese region were mobile gaming is highly developed has the partnership or the ownership of Tencent. The final graph of this section concludes that Tencent has taken over the most revenues on the games market. [112] Table 3: The Companies Making the most from Video Games. Public companies by video games revenue in 2017.

Source: Statista The table shows that the closest competitor by monetization of their games is Sony which holds the PlayStation Console platform – the most popular console. From this we can state that it is not even direct competitor since Tencent concentrates on mobile gaming vastly.

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3.6 WePay versus AliPay The growth of WePay system - the complementary product of WeChat messenger is dated by the early Tencent investments. In the year of 2005, Tencent establishes its online payment system TenPay within Paipai.com auction web-service. The type of which is C2C e- commerce (customer-to-customer) but it also supports B2B (business-to-business) and B2C (business-to-customer) payments. [117] From the very beginning of the year 2014 Tencent has made an investition to warehouses and logistics related company China South City Holdings Ltd. Afterwards on March 2014, Tencent purchases the a 15% stake of Chinese website JD.com that helds primarily electronic commerce business. The supplementary products that Tencent heads over are Paipai and QQ Wanggou. Along with, Tencent attaches to it the Yuxin company to level up with another Chinese giant Alibaba Group. The investments in total equal to $214,7 million in cash. Later, same year when JD,com came public IPO, Tencent acquires up to 17,43% of their stake offering $1,325 million of US dollars [119] In addition to this the Tencent Holdings make a purchase of stakes in 58 Tongcheng websites [115][116]. By the end of the year, another purchase concerning the e- commercial business revealed to be mobile shopping portal Koundai Gouwu offering them $145 million for a 10% stake. company specializes especially on the internet-shopping similar to Alibaba but China-oriented only. [117] Through the investments made in 2014, Tencent was able to launch the WeBank (China) initial and unique online-bank having no physical customer services in the beginning of 2015. [118] However, moving forward Tencent decided to accumulate their businesses and closing Paipai.com in order to get rid of the problems connected to fictitious registered items. The team of locked company has moved to other Tencent projects. [119] Later, the closed project restarted with the name “Paipai Second Hand”. [120] This project was established in order to make a competition to the 58 Tongcheng's Zhuanzhuan.com. The real issue is that both of them having a partnership of Tencent with investment into stakes. Similarly, to the game industry this method gives a hand to both companies making loud announcements and turning public attention to it. In addition, targeting the audience of already mentioned Alibaba group. AliPay, as a competitor to TenPay has launched its services in the earlier period, to be certain - in 2004. The Alibaba group initially had been developing the electronic B2B (business- to-business) shop Alibaba.com. After having a great growth in early years from 199 to 2003, the company decided to expand their businesses and launched the Taobao Marketplace within Alipay, Alimama.com and Lynx. [121] In 2003, seeing the growth of the chinese e-commercial

39 system, eBay made an offer to buy it out. However, being threatened by foreign competitor, Alibaba rejected the offer. In future years it has outperformed it on the Chinese market. When coming open in the US IPO they have recorded the highest initial offer - $68, in total $21.8 billion and bypassed Google, Facebook and Twitter combined [122]. Skipping the irrelevant to our company’s comparison fundamentals of the company's growth and coming to the point of investigation, the AliPay from the beginning allowed users extra features to higher the satisfaction of online purchases made on their service. As an example escrow - the service that secures the money payment of customer for future transaction. According to the goods quality to description provided a person can return the product back with the sum paid. By the 2014 it had over half of the whole online payments made on the market satisfying the need of 300 million Chinese users. [124] The financial company had rebranded itself as Ant Financial Services, however name AliPay is still commonly used. [125] The AliPay system supplies customers with simultaneous availability to connect several payment systems and easily transfer finances in between. It allows credit card, debit card, Alipay, Quick-pay and online-banking to manage together. Launching it to Taobao in 2009 people were able to easily proceed the payments between each other using QR codes. Thanks to the services provided Alipay has been nominated by Fortune’s on the sixth of the companies that Change the World in the list. It is also the highest valued fintech company globally and the most valuable startup company having $150 billion valued. [126] In 2013 Alipay has passed PayPal as “the world’s largest payment application’. Here beneath the graphic shows the rocket growth of China users using the payment systems online. According to the estimations provided next to it in the chart pie we are able to result that such growth is inevitably connected to Alibaba Group and Tencent Holdings competition. Graph 16: China Mobile Payment Volume 2012 – 2016 and China Mobile Payment Market Share for the first quarter in 2017

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Source: yousense.info Such a leap could be also caused by the poor dissemination of credit and debit physical cards caused by difficulty of entering Chinese market for foreign payment systems as Visa and MasterCard. Many Chinese users found online payments first before meeting usual to Europeans credits and debits. In case of Alipay the system was launched along with online shops. Contrary to TenPay that created WePay based on providing electronic payments to social network users. Concerning the benefits of WeChat that could have been reached only with government - payments for electricity, housing rents and even doctor appointment. The following bars present the information about different city services provided by WeChat and its acceptance of the society and active using. Graph 17: Cumulative users of WeChat City services in million users in comparison for year 2016 and 2017

Source: CAICT WeChat Economic and Social Impact 2017, WALKTHECHAT As shown above, most of the services doubled or even tripled in amount of demand. The most popular reveals to be transportation fees, that are undoubtedly covers more consumers than health, being for sure a good sign. An interesting fact to mention, the Apple Pay system has been launched only a year after Ten Pay took a share of the market with Ten Pay and started competition with Jack Ma. Thus, we may assume that Apple has inherited the ideas from the Chinese market in 2014. Generally, two companies are trying to avoid face-to-face rivalry and prefer to invest into their direct competitors on the market as for Tencent are other game companies, and e- shops on the side of Alibaba. The following map of investments proves this fact. Image 5: Alibaba and Tencent back a lot of Chinese unicorns

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Source: CNN and CB insights In September 2018, the head and the founder of Alibaba and AliPay has announced about his retirement. Such a ridiculous step might affect the competition between these investigated companies. However, AliPay shall remain a great competitor on the Chinese market due to system well-functioning system that has been founded by Jack Ma. [127]

3.6 Investments race Such an intensive investments policy has grown in the kind of race for the investments. On the following graph we can observe that their investments grow rapidly according to their own growth. Such incredible growth could be described as main focus of the company’s activity. Graph 18: Alibaba and Tencent Total Known Investments By year from 2008 to 2017

Source: Crunchbase news For the year 2017 they made investments for over 110 million of dollars. In comparison, to the previous year that equaled to about 70 million this gives us about 60% growth of their

42 financials from the year 2016. Let us take a look on the type of companies that Chinese companies tend to invest in. The detailed overview is given on the graph below: Graph 19: Tencent Known Investments By Stage

Source: Crunchbase news As we can observe their investment policy concerns not only the huge companies as Epic Games or Snapchat but is more about smaller kind of investments aimed on fast growing tech companies. This is especially easy to notice on the Alibaba investments which is 42.5% of the total finances invested by company. On the other side, Tencent has a bit lower figure of 36% that is still takes the most of its investment capital. Further analysis tells us that Alibaba is still prefers before IPO companies giving to the late-stage ventures 30% while Tencent is lower – 23%. What is more interesting, the almost equal part of investments of Tencent are dedicated to the other which should have meant to be secondary offers and unknown companies. To this stage of investments Tencent places 20% of their free cash. Taking a look on the kind of companies the make investments:

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Graph 20: Tencent and Alibaba investment activity since 2017

Source: AB Bernstein The current graph shows that most of the investments made by companies are referring to Artificial Intelligence companies that are nowadays the same vector for almost all huge IT companies. From this graph we can also conclude the importance of Big Data services and smart devices.

3.6 Tencent and Net Ease Talking about another competitor of Tencent on the Chinese market we should mention the NetEase company. The NetEase company is primarly game distributor company on the Chinese market. Outside of China it is better known for game company’s director as alternative company to enter the perspective Chinese market. It has developed an online massive multiplayer game Fantasy Westward Journey. From that moment they have not made any development and focused on their website boosted by early search engine technologies. They are famous in the Chinese market primarily having a license agreement with Activision Blizzard company that produced and experted such games in China as: Warcraft III, World of Warcraft, Hearthstone, StarCraft II, Diablo III: Reaper of Souls and Overwatch. The following graph will show how the company competes with Tencent Holdings:

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Graph 20: Online Game Revenue Market Share, Tencent and NetEase

Source: China Audio and Video Association Game Industry Committee (GPC), Company Reports As the graph makes obvious the company takes only fifth part of the total games revenues that Tencent does. However, it is still worth to mention that counter steps against Tecncent it certainly does: Graph 21: Number of IOS top 10 Grossing Games – Tencent vs. NetEase

Source: HSBC, Sensor Tower For instance, the graph above shows that NetEase have almost beaten the Tencent IOS game users which certainly does hurt stability of the company on the own market.

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4. FUNDAMENTAL ANALYSIS OF THE SELECTED COMPANY

4.1 Stock fluctuations

In the following chapter we will get more into the company’s analysis of their intrinsic value, and the positioning on the stocks market. In the current research we would investigate the stock market valuations of the Tencent Holdings stocks in comparison to its main competitors Alibaba as similarly originated from China and Facebook as the largest social network competitor on US market. We would also discuss the markets drops on the US stock market and make our own assumptions on future stocks fall/growth movement. Graph 22: The Stock price movement of Tencent on the US stock within 5-year period up to nowadays.

Source: Yahoo Finance As far as we can observe, the Tencent has been growing steadily within years from its IPO to the 2017. During the year 2017 up to 2018 we examine the great growth. This could be described by Tencent’s foreign policy on making active infestations in different US companies as Tesla and SnapChat’s company Snap. Inc. In addition, the value of the company has grown to enter in top 100 most valuable companies and surpass Wells Fargo [128]. Such a raucous event in addition to company’s real figure growth in quarter reports rocketed the stock prices up to $60 however, this was followed by plunge in 2018. Despite the fact, that Tencent had overall revenue growth combined to success on the game market by release of Ubisoft’s Fortnite, there were were several external cases that influenced general drop on whole Chinese stock market. [graph 22]

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Considering the Chinese companies on the US market, it is frequently discussed following companies: Tencent, Alibaba, Sina Tech, Baidu and Jd.com (the stock ticks respectively: TCEHY, BABA, SINA, BIDU, JD). To my point of view, it is not recommended to put JD.com, Sina Tech and Baidu in the same row since they are being times lower at the level of values. In addition, Tencent is owning 15% of JD.com that makes observations confusing and not clear enough. The Alibaba, on the other side has entered the circle of companies valued over $400 billion market capitalization same as Tencent and could be nicely compared. Hereby we can observe the percentage fluctuations of the most popular Chinese companies on the US market according to the period from the January 1, 2016 until April 1, 2019. This data provides us with understanding that the deep plunge of Tencent stocks that returned its estimated for the year back (not long ago in the terms of history) was caused by extrinsic problems on the market in whole. The most affected was the start of the politic of the president of America Trump against import of the Chinese products in US. It has influenced all stocks of Chinese Industries. However Tencent had few more threats despite it. Firstly, The Chinese government had decided to cut down the hours of playing for kids auditory due to their harmful addiction to the game. [129] As a follow, there began to appear many concerns about unstable situation in Chinese Republic that might damage its own powerful industry giant. [130] Graph 23: The fluctuations of the Tencent stock (blue line), Alibaba stock (orange), Sina Tech (red), Baidu (green), JD.com (yellow)

Source: Yahoo Finance Let us take a closer look on the stock market fall on the behalf of Tencent’s stocks. During the first half of the year its stocks dropped about 45% of their value, however at the moment we observe the gradual growth that has reached 83% from the highest historical level. 47

The Alibaba Group has also experienced a decline, but has reached its lowest price a bit later. Sina Tech in comparison to them was affected the most and has lost 56.5% of its price, and recovering back by now having 47.4% from its highest historical price. On basis of this graph, I may conclude about recovery of the Chinese stocks through the period of time. The least affected or the most sustainable in terms of people's beliefs is Tencent, having the exponential growth from the lowest point by only few months. On the contrast, Alibaba had a slight delay: by the beginning of 2019 it has still not reached its worst condition while Tencent has been on the rise already. The others Chinese countries haven’t reached their previous results yet and stands a chance not to recover at all. 4.2 American-Chinese trade war Currently, the stock market is overwhelmed by the news upcoming the morning 5th of May in 2019. The president has been claimed to consider another tariffs rise in his official Twitter account. [131] That should kill the trade between America and China for sure, however, according to estimations, it seems to more intimidations that a real deal. Despite the estimations, the Chinese stocks are started already falling, though no conclusions could be made upon current period of time. Image 6: US tariffs against China (source: US Census Bureau, BBC research)

Source: BBC News [132] During investigation, we resulted to leap the dividend discount model comparison due it is considered to be inappropriate for the modern model of Chinese companies that preferably place revenues in a turnover rather than paying off the dividends. This is how the Alibaba Limited has fully abandoned this politics while Tencent is (ironically) paying of the dividends on average around ten cents ($0.1). Concerning the last dividend pay off that has been announced to be on May 16, 2019 dividends will be paid in the sum of $0.112 4.3 Price to Earnings ratio In following investigation it is essential to get to the side of Price to Earnings and Price to Book value comparison. In the cut of giant conglomerates Tencent, Alibaba. the following investigation begins with understanding what the P/E means.

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The Price to Earnings ratio describes the eagerness of the buyer to pay the exact sum of money for each $1 of earning of the company. The formula of it looks following:

P/E = Price of the share/ Earnings per Share

Thus, the formula consists two variables that can cause the increase or decrease in its value. Let us observe several cases:  when the price of the share increases, holding Earnings per Share meaning the investors willing to pay more for it (excluding the case of the decrease of the number of shares).  when the price of share decrease, holding the Earnings per Share meaning that interest of investors falls and they start selling it.  … (to continue the list let us give understanding of the Earnings per Share meaning) The Earnings per Share (EPS) is the profit of each share that keep shareholders in case when the whole profit of the company is equally divided between them. The formula looks following:

EPS = Net Income/ Number of shares

Thus we may conclude that increase in the EPS while keeping number of shares constant means that company's activity has the positive growth. And vice-a-versa, when we observe the decline in EPS, commonly it follows that Net Income of the company was less ensured for the number of shares than for the last period. Continue on the list:  when EPS growing while the Price increases - it is the case of natural shares behavior, the E/P accordingly stays the same, and vice-a-versa  when EPS growing while Price decreases - means that people have many concerns about the future of the asset, believing it will terribly fall through some time.  when EPS falls while Price increase - it means that despite the lower revenues, holders still believe that stake will be on a rise in the future and continue buying it. Now, let us turn back to our investigation of the Tencent and Alibaba stakes through the period of 5 years. The data mined from the university’s Bloomberg computer account and then

49 personally computed. Due to the fact that initial numbers are taken from the company's reports, whole numbers are provided in Hong Kong Dollars. Hereby we can observe the company’s Net Income comparison and its own growth.

Table 4: Company’s Net Income by the end of each year in HKD in Millions

Company 2014 2015 2016 2017 2018

Tencent 21,262.0 27,985.0 38,750.0 59,339.0 63,178.0

growth 38.17% 31.6% 38,4% 53.13% 6.4%

Alibaba 19,296.0 30,432.0 40,552.5 66,914.6 N/A

growth -16,5% 57.7% 33.2% 65% N/A

Source: Bloomberg Computer Report system, Alibaba annual report 2018 [133] According to the numbers, we observe the astonishing growth of the Income as for the US market. However being set in the China and keeping the growth of the China’s economy - over 30% growth each year this is a good result. As for Tencent, we observe the jump in 2017 that was known as great for investors to invest into China stocks. We also have the same situation with Alibaba same year. However, according to the reasons above, we are witnessing the large reduction in 2018. Afterwards, we investigated the fluctuations on the market of stakes trade. By the cause of reports given in the Hong Kong's Dollar we exchanged the values from USD by the historical rate. However, the USD is mentioned in the brackets to each of them.

Table 5: Price per Share, by the end of each year

Company 2014 2015 2016 2017 2018 May, 2019

Tencent 111,56 152,05 195,55 436,9 318.05 390,57 ($14.38) ($19.62) ($25.20) ($55.87) ($40.62) ($49,76)

Alibaba 803,936 629,84 728,58 1491,27 1094,24 1532,25 ($103.6) ($81.27) ($93.89) ($190.7) ($139.75) ($195.21)

Source: Bloomberg Computer Report system As we have discussed earlier on the graph, both companies are were experiencing growth: the Tencent’s stock even doubled in 2017. However, next year it dropped significantly. Same situation appears to be with Alibaba. The up-to-date price on May is given 50 to show the increasing tendency after the fall in the beginning of the year. Despite it, on the moment of writing this thesis it should be declining by the reason of Taxation threatening of D. Trump on these days. The next data was provided by Bloomberg’s computer and reveals the Earnings per share ratio for investigated companies.

Table 6: Earnings per Share (EPS), by the end of each year

2014 2015 2016 2017 2018

Tencent 2.27 2.97 4.08 6.22 6.6

growth 37.57% 30.8% 37.37% 52.45% 6.1%

Alibaba 7.76 11.88 15.76 25.63 30.69

growth -28.9% 53.09% 32.66% 62.62% 19.74%

Source: Bloomberg Computer Report system Following the analysis the EPS has been rising accordingly to the Net Income growth, which gives us a proof that the number of shares of the companies were not shifting significantly. By comparing the Net Income growth rates and EPS growth rates we can result by how much the changes in quantity of shares changed and were affecting the price of the asset. As a result, we can say it was not affected and Therefore, we can proceed to the analysis of the main figure of Price to Earnings.

Table 7: The Price to Earnings (P/E) comparison, by the end of each year in HKD (USD)

Company 2014 2015 2016 2017 2018

Tencent 49,15 51,19 47,92 70,24 48,19 ($6.33) ($6.6) ($6.17) ($8.98) ($6.53)

Alibaba 103.6 53,01 46,23 58,18 35,65 ($13.35) ($6.84) ($5.96) ($12.1) ($6.36)

Source: Bloomberg Computer Report system As we know from the table 7 Tencent had an income growth through whole period despite 2018 were the US taxation regime and intrinsic problems of company affected it most. On the table # above we observe almost the same level of P/E in 2015 and 2016, meaning that

51 estimation kept to the same tempo that company growth (slight increase was caused by lower level of EPS increase in contrast to the previous year). Alibaba at the year 2015 appeared to be overvalued due to the reasons not investigated in our research, but kept up with the same level in 2016. In the year 2017 we investigate a slip from 51,19 to 47,92 and from 53,01 to 46,23 by both companies. This was caused by exponential growth (over 50%) of the profits by both of them that could not keep up with the growth of share prices (despite that they have grown twice). In that year they were undervalued. However, in the 2018, the price dropped by approx. 30% that turned the price back, since the growth in EPS of both companies fell a lot. In the year 2018, Tencent was fairly valued according to historical values. However Alibaba - undervalued, since its net income growth tempo was unexpectedly high in comparison to Tencent that year.

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5. COMPUTATION OF THE INTRINSIC VALUE OF THE STOCK USING

METHODS AND TOOLS OF FUNDAMENTAL ANALYSIS

5.1 Free Cash Flow of the Firm analysis To begin with, let us describe the following two figures that are recommended for every investor to notice before making the decision on investing is Free Cash Flow of the Firm or oftenly called also shortened Free Cash Flow (FCF). This is a description of such amount of cash of the company that is distributed after proper investigations have been made. To do so we take the sum of the Cash flow after operating activities and subtract the purchases of property and equipment lines. By the end we have more accurate description of the money value accumulated by the company. It is even more strict than EBITDA or Net Income because it doesn’t include such sums as capital expenditures and cash changes in liabilities that are included in the process of leading the business. Thus, the FCF gives us clearer view on the financial analysis of the company and it is often used for the practice of Discounted Cash Flow analysis. The other analytical instrument is a Free Cash Flow of the Equity or shortened FCFE. The FCFE reflects the amount of cash from operations that is less capital expenditures and liabilities of the company paid. The main difference from FCF to the Firm is that whereas FCFF would be diversified between all types of investors, the FCFe would be only parted between shareholders. Both following models are described to the company valuations. It is more actual to the companies that have no or minor dividend payouts as in our case is. Due to the Alibaba and Tencent's policies, they have low priority on dealing with dividend payment, by the cause of its origin. Hereby we summarized five following differences of observed analytical tools:  In FCFF the impact of leverage is excluded whereas FCFE contains such. This is due to subtracts of such factor as net (debt) repayments that disappear in Free Cash Flow to Equity. Thus, FCFE is levered.  FCFF is commonly used to calculate the firm's value whereas FCF to the equity as the name suggests refers to the value of the equity.  In FCFF all the capital sources are included in the model estimation whereas in FCFE the risk of shareholders is included in their equity part only.  FCFF is often used by managers of the company, especially with highly leveraged firms. It allows the real possibilities of the company to proceed their

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business, whereas the FCFE is commonly investigated by analysts to be a more accurate description of the company’s sustenance to cope with levered capital. The shareholders and investors of Tencent and Alibaba companies are not relying on the profitability of their shares a lot and mainly focus on the volatility of the stocks. Probably, to my opinion, it varies the price of the stocks a more than in other companies who pay the dividends due to the concerns that spread around - so far, the only thing that investors can rely on while trading the stocks. Moving to the practical side of the analysis, the following tables show the calculation process of the FCFF for the Tencent and Alibaba companies in 2018 and 2017. This is the most current information and equally, this is the cut of the two years that were the best for the company’s rise (2017) and the worst (2018) due to the reasons desscribed previously. Let us analyse how both of them recovered. The data is given in Renminbi - the Chinese currency since both reports of companies represented in it. However, for convenience purposes, we transferred the final result into US dollars. Table 8: The Free Cash Flow to Firm comparison for Tencent and Alibaba

Tencent Alibaba

2018 RMB’ 2017 RMB’ 2018 RMB’ 2017 RMB’ million million million million

Operating Cash Flow 120,964 120,002 125,171 80,326

 purchase of prop. 19,743 12,108 25,809 4,114 & equip. line

FCFF 101,221 108,092 99,362 68,790 ($16,143) ($17,239.5) ($15,841) ($10,971)

Source: Tencent Annual Report 2018, p.140, Alibaba Annual Report 2018, p.28 [133]

From our calculations, we can observe that Tencent almost equalled the result of previous year though it had a great reduction in its investments the same year. The real damage was dealt with the rate of growth which increased year by year but in 2018 almost completely reduced. In the 2018 year, Tencent had higher their purchases of property and equipment line by 7,635 RMB million. This led to the deterioration of the FCFF by 6,871 RMB million.

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In comparison, Alibaba has increased their Cash Flow from operation by 56% what gave a large boost to the FCFF that increased by 30,6% despite an increase of purchases of P.&E.L. more than in 6 times. The Free Cash Flow of both companies has reached almost the same level in 2018 despite the large difference in 2017. This shows that despite the people's concerns about Chinese stakes we observe the growth or at least stability on the example of Alibaba and Tencent. 5.2 Free Cash Flow to the Equity analysis The next table compares two companies in the FCF of Equity measure that will is more into our interest since it reflects the possibility of the firm to cover the liabilities by the credits and other debts. Remark: the numbers in the brackets in Alibaba column for a string FCFE are calculated excluding the net (debt) repayments. Table 9: The Free Cash Flow of the Equity comparison for Tencent and Alibaba

Tencent Alibaba

2018 RMB’ 2017 RMB’ 2018 RMB’ 2017 RMB’ million million million million

Operating Cash Flow 120,964 120,002 125,171 80,326

 fixed capital 23,941 13,585 29,836 17,546 expenditures

 net (debt) 12,170 16,332 N/A N/A repayments

FCFE 84,853 90,085 N/A (95,335) N/A (62,780) ($13,533) ($14,367)

Source: Tencent Annual Report 2018, p.140, p.24, Alibaba Annual Report 2018, p.28 [133]

The comparison table makes evident that Tencent has reduced the Free Cash Flow of the Equity by 5,232 RMB million in the annual 2018 fiscal year. In comparison to 2017, capital expenditures increased radically to 76%. Same year Tencent lowered the repayments to its liabilities by 4,162 which is a good thing that the repayment is still being made. Unlike Tencent’s, the Alibaba’s annual report of both 2018 and 2017 does not consist of any information concerning their net debt repayment, therefore, we conclude that such

55 payments were not paid at all. In the report available such information: an average debt outstanding reflected primarily US$7.0 billion in 2018 and US$4.0 billion for a five-year loan in 2017. Their loans have increased dramatically, however no evidence of repayments seen. According to the data about FCFF in which both rates were converged in 2018, we may deduct about the number of repayments that could have been made by comparing the FCFE of Tencent to FCFE (excluding net (debt) repayments) of Alibaba. About 10,482 RMB million could have been paid for covering the loans of Alibaba ad staying on the same level as Tencent. However, it is a bad sign for an investor that debt is not serviced at all. For the reasons concerning this, we need to proceed with the investigation for inside information of the company’s politics that lies outside of the topic investigated. All in all, Tencent looks like a great competitor to Alibaba and reaching high results despite some estimations of the analysts in 2018. The revenue growth is stable, the P/E ratio generally relies on people’s estimations thus considerable fluctuations are expected, and FCFF and FCFE are showing the nice image, though it would be interesting to observe the detailed plan of purchases of equipment lines and fixed capital expenditures.

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6. DISCUSSION OF RESULTS, FORMULATION OF INVESTMENT RECOMMENDATION

The following chapter will summarize the data investigated in the previous two Chapters concerning the market position of Tencent, its strategy and the company’s financial positioning. We will also try to apply the assumptions about key features of the company’s success. According to the evident data, we will represent our own general point of view about investments that could be made from the position of stake traders and owners of the company. It would be also reasonable to mention that we will not talk about inside information about the company. All the conclusions are made upon public information and investigation summarized in this Thesis. The Internet-based company Tencent has been growing since 1998 on the territory of China. This gave a great stimulation of the continuous growth with the help of the Chinese government that excludes the rivalry and competition that is known on the West. The chosen companies that have taken a ride over the selected branch and already got some population is being supported further. Similarly, as Tencent has grown up with its QQ messenger and further Weixin messenger and has taken the whole auditory leaving any competitors on the Chinese market step back and rearrange their finances into other branches. Their positioning on the market undoubtedly relies on the Chinese market. The huge auditory is growing on the bases of their games which gives a huge boost to their finances. On the Eastern market outside of China, they have already built up strong relationships with South Korea within the gaming field. Their WeChat functions, as long as we can observe, continues to extend their features on the Chinese market primarily and not spreading their attention to the other territories even Eastern. On the Western part of the world Tencent intensively develops the investment policies, meaning by this mainly the Europe and the United States zones. 6.1 Advantages and Disadvantages The Tencent has a great model of monetization of their product. Where European competitors of Tencent are hesitating to push on the customer needs to gain revenue from additional customization goods (for whether the reasons of beliefs about different mentality or the low/unstable revenues growth) the Chinese conglomerate pushes the limits and on the regular bases tries different approaches and investments strategies. The great example of such approach are the huge approach to new spheres of influence within investments activity.

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Also, good to know, that Pony Ma, the head of Tencent realizes the need of radical development steps and contribution of previous products to the new ones. In one of the interviews he mentioned that it should be an ordinary thing for a large company to behave like a “cannibal” by scarifying their old projects to the new ones. This strategy he inherited from his mastermind Steve Jobs that remains for him a role model. The example of such behavior was transformation of QQ chat to WeChat. The head of the company gave a brave idea of the new type of communication to come in reality in China at that time. This definitely differentiates Tencent among its largest competitors on the Western market and gives space to apply their Chinese model of monetization. Another great advantage for Tencent is that generally the selected company has not entered the Western market by itself. Their positioning on the market is viewed within their investments into other companies. By multiple different investments it growth up the revenues avoiding serious influence from any competitors or governmental negative impact. Despite that company specializes itself on the game and media fields mainly it has o direct leverage that could hurt its profitability. This also concerns the continuous investments. By all means, Tencent would not survive on the market having only few successful investments made. Nevertheless, it remains unavailable for investigation the methods they use to identify the projects of investment interest. The probable key mentioned as investing into the similar projects in their report. Concerning this, they have summed up a great amount of applications that get in use of Chinese society, so this should refer to the outlandish relationships with other companies. 6.2 Tencent behaviour as investor According to the further politics Tencent representatives have stated that they are not going to stop on further investments and by this threatened some social rounds that in beliefs of Chinese superiority. Although, no company has ever felt any pressure from faces of Tencent during the board meetings and concerning their strategic look on the development goals. Tencent representatives always leave a company to head their own strategy. By investing into the company, they prefer to observe the situation rather than make decisions on it. The case with Riot Games for instance, has many times confirmed that attitude to their business. In addition, they poured their capital to Blizzard Games to help them diversify from French media company. So there is no reason to believe in the aggressive investor Tencent. While investing in Tencent, it is better to think about “investing into investor”. This is probably the great stake in our portfolio as the one that needs a certain time. At the moment we observe the decline that should definitely lower the growth tempo. But investigating the reasons

58 of such we conclude, that this is primarily affected by the American-Chinese trade war. The selected company unlike others that transfer their businesses directly, has growing their revenues through foreign companies. On the other hand, we can be threatened by Chinese government that has a great control over it. They are actively boosting their business to the social groups by offering to connect governmental procedures through their WeChat application. Despite that, they are pushing them to lower child audience interest by preventing the usage by few hours. To my mind, such step has less effect on revenues than the positive side of governmental commitment. The child group much more relies on the parent’s and even though this has a long run effect of growing new generation upon their games, there is no short run profit growth. While transport ticket payment engages new levels of society to join the network almost inevitably and dominate upon other applications in their Monthly Active Usage. Shifting standards to our reality, companies would never expect to gain such an advantage from governmental support, but would definitely face to restrictions for gaming hours and therefore health institutes disadvantages to their businesses. This should result that no other company could gain such sustainable growth other than Chinese. 6.3 Investing in the investor As the investor of Tencent, we should be aware of the fluctuating nature of the stock. The following Thesis does not give any recommendations concerning the short term investments due to unpredictable nature of the political decisions (primarily American, because China is still trying to continue their previous deal ship). The idea is in long term investments. At the moment the Tencent Holdings is having a plunge on the stock market due to the US confrontation towards Chinese trading relationship. The Taxation policy is getting stronger to defend its own economy from further dependency. In turn, China has no such leverage from USA and keeps growing their economy under the communist supervision. This concerns low American import and majority of tech-fabrics located in China territory. While on the subject, it is worth mentioning that discussed Chinese companies Tencent, Alibaba and Baidu have invested into 30% stake opened to the public share offer of Foxconn company, the largest Industrial supporter of Internet in China and along one of the supplier of Apple’s IPhones after it has passed the IPO estimated in US$4.3 billion. The following company is also the first to get IPO in terms of few months instead of several years which is common on the Chinese market. This is a good signal for investors to find another Chinese firms that went open. Backing to the point, the Tencent has shown stability in growth of own revenues and the strategic plan for future continuous investments. Along to it, they have growing financial

59 performance even despite the previous year restriction. For us, as investor this should give possibility to own their stakes for a lower price. The P/E ratio by the end of the 2018 has fallen as the year before. Along with this, their intrinsic finances grow, showing that this is the great price.

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CONCLUSION The main of objective of the Thesis was to investigate the fundamentals and analyze the online-based industry with respect of selected company. According to it, we have covered the background of selected company Tencent and its products from the different markets and put it in comparison to Alibaba company while using models and methods for deeper investigation. The current investigation has covered the deep analysis of different competitors of Tencent on the markets and then proceeded to the market stock evaluation in comparison to the other competitors on the same market. This has shown, that Tencent has a leader position on the market of China from the position of messenger and communication services. This also refers to the mobile-phone games which are covering over 90% of the people’s smartphone usage. During our investigation we have also outlined the cooperation and influence of Chinese government on the selected company. The following research showed that governmental structure gave a huge boost to the finances of Tencent by supporting it starting from their IPO. Nowadays, it has surpassed the US market by smartphone users, which showed us the great advantage of the Chinese market for mobile-games. 98% of all users of Internet network in China are connecting to it through their mobile phones. Current investigation shown, that the company has no needs to enter the other markets with their WeChat application. Other markets have a strong rivalry situation with messenger’s companies and customers prefer other methods of communication. The cost of smartphones is too high to apply the same strategy as in China. Thus, the company is now seeking for investor relationships with the growing companies outside of China for several reasons: firstly, to investigate the market and specific needs of the customers; secondly, to transfer the other products to Chinese market through their application and get the win-win situation. Proceeding to the investigation of the company’s situation on the market of assets we found that the stocks of the company are available on the Hong Kong trading zone and American NASDAQ. We have focused on the American due to the fact that another Chinese competitor Alibaba has entered the US stocks market only. I addition, we wanted to compare Tencent to the others as Facebook. By the research flow we found the tendency of growth on the market. However, during the past two years there were seen unexpected fluctuations. Deeper analysis using the P/E method has shown, that Earning per Share ratio had no sign of any plunges. On the other side, the price of the shares were effected all Chinese stocks and competitors to Tencent

61 during these two years. It appeared to be strong political influence of the US-China trade war. Despite that fact, Tencent it was least damaged thanks to the diversified risks. By now, since the war is even severer we expect another slope of its price. By previous estimations up to US$30 (from US$50). However, such a great reduction is caused by low dividends that is included in Tencent politics. Thus, the price level even more relies on the people’s expectations. The current situation between US and China does not give any certain position about future of the company, therefore, it is predictable to have such a volatility. In the next part of our investigation we decided to use the FCFF and FCFE models to estimate the companies true value. Since the dividend policy is low and the competitor has omitted it at all, we also refused from taking DDM model into consideration. The research using Free Cash Flow Models has shown positive results. In comparison to the competitor it has slow down its growth due to the current situation. Lastly, we have tried to summarize the current vector of the company’s movement. This has shown that Tencent continues to build up the relationships with different companies around the world for both engaging their business in China within WeChat as well as investigating other markets and finding the space for new products. According to the Pony Ma interviews, we can assume that Tencent will continue on growth on the foreign gaming market. Proving this, it has already shown the great success in cooperation with Fortnite and PUBG developers that are currently are great competitors on the market. All in all, despite some concerns about Chinese companies, the research has shown that it is certainly needs to be in attention of investors. It is possible that further situation on the political side will get even worse, however, Tencent has built up their business with certain market diversification. By investing into the foreign countries and not entering by themselves they can avoid the major damage and continue on their growth. As a researcher, I would like to inspect their further actions on the market taking also other angles into consideration in future. I believe, that there are even more unknown sides of the company that could be investigated and would like to keep up with it.

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LIST OF GRAPHS Graph 1: China e-commerce market gross merchandise value (GMV), 2009-2016 Graph 2: Value of e-commerce transactions (in billion USD)] Graph 3: 98% of Chinese Internet Users are Mobile; number of internet users in China in million Graph 4: WeChat monthly active users Graph 5: WeChat users by occupation Graph 6: Monthly Active Users by Social Platform on January 2019 Graph 7: Most Active Social Media Platforms; Percentage of internet users who report using each platform (survey based), internet users within 16 to 44 years old Graph 8: Revenue of Face book in month from 2016 to 2018 years Graph 9: WeChat revenues by types Graph 10: How China’s Social Media Giant Compares to Facebook Graph 11: Riot Games revenues from 2015 to 2018 years Graph 12: Top 10 Public Companies by Game Revenues. 2014 and 2013 years Graph 13: Number of players in millions of Fortnite game in period from April 2017 to June 2018 Graph 14: Clash Royale Cumulative Gross Revenue App Store and Google Play, Worldwide Graph 15: Global Games Market Value 2018 Graph 16: China Mobile Payment Volume 2012 – 2016 and China Mobile Payment Market Share for the first quarter in 2017 Graph 17: Cumulative users of WeChat City services in million users in comparison for year 2016 and 2017 Graph 18: Alibaba and Tencent Total Known Investments By year from 2008 to 2017 Graph 19: Tencent Known Investments By Stage Graph 20: Tencent and Alibaba investment activity since 2017 Graph 20: Online Game Revenue Market Share, Tencent and NetEase Graph 21: Number of IOS top 10 Grossing Games – Tencent vs. NetEase Graph 22: The Stock price movement of Tencent on the US stock within 5-year period up to nowadays.Graph 19: The fluctuations of the Tencent stock (blue line), Alibaba stock (orange), Sina Tech (red), Baidu (green), JD.com (yellow)

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LIST OF TABLES Table 1: Top free-to play games by revenue in the first quarter of 2018 Table 2: Global PC Game and China IOS Store Rankings (July 2018) Table 3: The Companies Making the most from Video Games. Public companies by video games revenue in 2017. Table 4: Company’s Net Income by the end of each year in HKD in Millions Table 5: Price per Share, by the end of each year Table 6: Earnings per Share (EPS), by the end of each year Table 7: The Price to Earnings (P/E) comparison, by the end of each year in HKD (USD) Table 8: The Free Cash Flow to Firm comparison for Tencent and Alibaba Table 9: The Free Cash Flow of the Equity comparison for Tencent and Alibaba

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LIST OF IMAGES

Image 1: The company’s structure Image 2: Devise usage and e-commerce growth in China for January 2019 Image 3: Top Social Messengers Around the World in January 2019 Image 4: Internet penetration by region (large number), Social Media penetration by region (smaller number) Image 5: Alibaba and Tencent back a lot of Chinese unicorns Image 6: US tariffs against China (source: US Census Bureau, BBC research

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