China's Tencent to step up acquisitions

By Vinicy Chan

HONG KONG (Reuters) - Tencent Holdings (0700.HK: Quote, Profile, Research, Stock Buzz), China's top Internet portal and instant messaging service, plans to step up acquisitions at home and turn around a loss-making auction and search business over five years, its president said.

"We will actively seek acquisition targets," Martin Lau said in an interview at the firm's representative office in Hong Kong as part of Reuters Global Technology, Media and Telecoms Summit on Wednesday.

"Chinese rivals are on the top of our priority list," said Lau, a former Goldman Sachs banker who now oversees a thriving Web community of over 200 million offering everything from online dating to Internet games.

Tencent has made relatively few acquisitions, but it now has 3.2 billion yuan ($416.6 million) in cash on hand and in January it paid 20 million yuan for Beijing BIZCOM Corp, a mobile and telecommunications value added services provider.

"We're looking at all possibilities of growing our business," said Lau, who has over a decade's experience advising on IPOs, mergers and acquisitions.

Shenzen-based Tencent, founded in 1998, has enjoyed roaring success in the world's second largest online community.

It operates a "QQ" messaging service -- sporting a logo of a penguin wearing an outsize scarf -- that serves more than half a billion user accounts across China. Since it went public in 2004, Tencent has seen its share price rise eight-fold.

The messaging service now competes directly with Microsoft Corp.'s (MSFT.O: Quote, Profile, Research, Stock Buzz) MSN, particularly in the high-end and business segments. According to Shanghai-based consultancy iResearch, the firm -- which has a market value of some $7 billion -- controls 79 percent of the Chinese messaging market.

On Wednesday, Tencent reported a 16 percent rise in first quarter profit to 290.2 million yuan (US$37.78 million).

NEW VENTURES

Taking advantage of a swelling user base, Tencent has also ventured into advertising, games, an auction site and a search engine -- competing with the likes of eBay (EBAY.O: Quote, Profile, Research, Stock Buzz), Google (GOOG.O: Quote, Profile, Research, Stock Buzz), Yahoo(YHOO.O: Quote, Profile, Research, Stock Buzz) and domestic arch-rival Sina (SINA.O: Quote, Profile, Research, Stock Buzz).

Though Google and Yahoo have been making inroads into China, analysts say domestic operators such as Sohu.com (SOHU.O: Quote, Profile, Research, Stock Buzz), Netease.com (NTES.O: Quote, Profile, Research, Stock Buzz) and Alibaba -- which run businesses overlapping with Tencent's -- held an obvious cultural and first-mover edge.

Tencent's loss-making auction site, Paipai.com, and search engine, Soso, should become profitable in five years, Lau said.

Credit Suisse said in April that the launch of new games in the second half would prove vital to sustaining growth. Tencent's online games division chalked up 141 million yuan in revenue in the first quarter, about a fifth of turnover.

Another relatively new segment is advertising, which saw revenues jump 77 percent to 74 million yuan in the first quarter.  Continued...