WeChat: Tencent's not so secret weapon

Just two years ago, Tencent Holdings Ltd introduced a mobile instant-message application called WeChat. It already has 200 million users, including Lai Jingkui, a teacher in China's southern Zhuhai city, who uses the Drift Bottle function to find friends.

While Lai, 23, is still looking, Tencent has found a hit. WeChat's user base could double to 400 million within three years, providing the chance for China's biggest Internet company to boost revenue by adding mobile e-commerce and location-based advertising, Core Pacific-Yamaichi International Ltd believes.

The logo of Tencent's instant-messaging service QQ alongside Sina Weibo's logo. Last year Tencent endured its secondslowest annual profit growth since it listed on the Hong Kong Stock Exchange in 2004. The trend is pulling users away from Tencent's off erings toward competitors including Sina Corp's Twitter-like Weibo, which had built a user base of 424 million as of September. [Photo / China Daily]

That's welcome news for Shenzhen-based Tencent, which last year faced its second-slowest annual profit growth since it listed on the Hong Kong Stock Exchange in 2004. The problem? A shift in Internet usage from personal computers to smartphones and tablets.

The trend is pulling users away from Tencent's offerings toward competitors including Sina Corp's Twitter-like Weibo, which built a user base of 424 million as of September. Sina was projected by analysts to turn from a loss to a profit in 2012. Net income growth this year is estimated to be more than double Tencent's.

Tencent is counting on WeChat to close the gap.

"Implementation of WeChat will help Tencent get into a new growth stage, as the company has traditionally relied on online games," said Kevin Tam, an analyst at Core Pacific-Yamaichi in Hong Kong. "WeChat can replace online games as a growth driver in coming years."

Tam projects the free WeChat app will begin contributing to sales in 2013. He hasn't forecast the amount of sales yet.

Tencent, founded in Shenzhen in 1998 with an instant-messaging service called QQ, started its QQ Game Portal in 2003. For the past decade, online games such as Dungeon & Fighter and Cross Fire propelled Tencent's growth and contributed 56 percent of revenue in 2011. Now, casual gaming on smartphones and tablets is eating into the growth of gaming on PCs.

Tencent's net income is projected to increase 24 percent to 12.6 billion yuan ($2 billion) this year, according to the average of 19 analysts' estimates compiled by Bloomberg. That's down from 27 percent in 2011 and less than half the 56 percent profit growth in 2010. It would be the slowest pace since a 9 percent gain in 2005, according to data compiled by Bloomberg.

Meanwhile, Sina is projected to rebound from a loss and post a net income of $25.7 million in 2012, according to the average of 17 analysts' estimates. In 2013, growth in profit will outpace Tencent's projected 28 percent pace, rising 64 percent to $42 million, according to the estimates. Sina's market capitalization is $3.1 billion, compared with Tencent's $59.7 billion, according to data compiled by Bloomberg.

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