When looking at the growth potential of advertising for Tencent, parallels are drawn to Facebook’s more-developed advertising business, in particular the much higher number of ad impressions served to users. But perhaps this is an unfair comparison, and it is worth considering the growth runway through the lens of Allen Zhang, WeChat’s creator, and an individual that follows a very unique set of guiding principles.

In an illuminating article for the venture capital firm Andreesen Horowitz, Connie Chan dissects the key product principles espoused by Zhang, known as “the father of WeChat” in China. WeChat, owned by Tencent (HKEx: 700), is arguably one of the greatest apps ever created. It commands much of the attention of Chinese netizens as they peer into their smartphones, enabling users to do things such as book cinema tickets, pay for a restaurant meal, and countless other activities. WeChat is an indispensable app when living in China. So if Tencent has such a dominant share of the attention of Chinese users –in other words, it has the “eyeballs”–why wouldn’t it just ramp up its ad load to a level comparable to that of Facebook?

Consider the fact that previously WeChat was only showing one ad to users on WeChat Moments (also referred to as Weixin Moments), and has only recently increased its ad load to two ad units per day. Only approximately 50% of WeChat Moments daily active users (DAUs) were shown a second ad unit in 4Q 2018. This is very low, and a fraction of the ad load of Facebook, which is much more advanced in its rate of ad load.

On the most recent Q4 2018 earnings call, Tencent management drew the comparison when they highlighted that “we’re currently running 1 to 2 ad units per day versus global peers running around 10 ad units per day”. Does this signal an enormous ad load growth runway for Tencent? Perhaps, but investors should temper their enthusiasm when viewing any decision to increase ad loads in the context of how WeChat, or more specifically its creator Allen Zhang, approaches product choices.

A fundamental tenet of Zhang’s approach is to think of WeChat users as friends, and to put the interests of users above all else. Part and parcel with this is the avoidance of any monetization that could negatively impact the user experience. In the words of Zhang: “If WeChat was a person, it would be your best friend based on the amount of time you spend on it. So, how could we put an advertisement on the face of your best friend? Every time you see them, you would have to watch an advertisement before you could talk to them.”

This is not to say that there isn’t still further advertising monetization potential in the form of increasing WeChat ad loads. Tencent’s Chief Strategy Officer confirmed on the Q4 2018 earnings call that there remains “ample room to increase ad load over time”, but it will be done at “a measured pace”. However, it’s likely that drawing too close a comparison to Facebook’s monetization philosophy would have led to an overestimation of the revenue potential of Tencent’s advertising business.

While we believe that Tencent’s advertising business will continue to grow strongly, the chances are that its long term ad load potential will fall short of that of its Western peer. This is so long as Allen Zhang has any say in the matter.

Montaka owns shares in Tencent and Facebook 


George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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