Tencent’s business model can be visualized by explaining two terms: spawning and two bazooka approach. The framework of the spawning investment strategy was developed by Mohnish Pabrai, the founder of the Pabrai Investments Funds, a Warren Buffett’s style value investor who generated a cumulative return of 671% for his investors, since the fund’s inception near the end of 2000 over the next 20 years.
He defines spawners as companies that spawn related and unrelated businesses. The term is taken from biology and refers to female frogs that produce a clump of spawn each in the spawning season. During the weeks of spawning, many baby frogs are brought to life in the water as a result.
Spawning companies keep adding many businesses and expect some of them to fail. The successful ones remain and operate under its parent company.
Tencent is a perfect example of the latest type. It does all spawning strategies that have resulted in the ecosystem of products and solutions that are a significant part of everyday life for millions of people. This penetration can be achieved only by a successful spawning strategy.
- penetration – 渗透，占有率
What apex spawners have in common is diversified revenue streams from a wide range of ventures, products, services, or investments, plus a very tax-efficient approach of running the business since they invest pre-tax earnings into new projects.
Tencent’s market capitalization has increased by a whopping 57,183% since its IPO. Even buying Tencent 5 years ago would result in a 132% gain compared to 116% of the S&P500 for the same period of time.
Another reason why apex spawners are great investments is that they provide an investor with a high level of diversification within the business. Owning Tencent means broad exposure to the market. The company is a great example of a business that constantly keeps making bets, expanding, searching for new opportunities, acquiring, and reinvesting. All of it runs under the leadership of one of the most brilliant CEOs – Pony Ma.
- diversification – 多样化
Two Bazooka approach
A very illustrative picture of Pony Ma’s way of running Tencent was made by Mohnish Pabrai in one of his recent speeches to the students at Boston college, namely a two bazooka approach.
- Bazooka – 火箭炮
First of all, he stressed out that there are only two large companies that know how to allocate capital effectively and execute on it. These would be Amazon and Tencent.
Pony Ma is running two businesses. The first business is an army of software engineers. This army of engineers is compared to the first bazooka, which he decides where and how to fire. For example, the moment the rumors on regulations on video games spread, the bazooka immediately changes its objective, in this case outside China. From this moment the army of software engineers focuses on other markets. Mohnish goes even one step further by saying that even if video games were banned in China, Tencent would still prosper thanks to the highly skilled software developers who can adapt and expand other fields.
注：此段说当关于视频游戏的流言四起时，腾讯立即将目标转向海外市场。从 2021 年三季度财报起，腾讯将国际市场游戏收入单独列出。
With that in mind, each year Pony Ma looks at the cash flow statement and at how much free cash flow the company generated. For the sake of this example let’s assume $22 bln. as it roughly was YTD. And from here on, his strategy seems to be very simple.
He goes to the army of engineers and asks them how many more developers they need. Since it’s not an easy task to find great developers in big numbers, so frequently, he hands them $1 bln to hire, let’s say, 5,000 software developers. With the remaining $21 bln. Pony Ma turns to his second business which is, as Mohnish says, thirty digital Warren Buffetts which would be the second bazooka.
He gives them $21 bln. and wishes them fun. What this group of people does with this amount of money is they invest it partially in whole acquisitions, but mostly in the minority stakes of multiple enterprises.
注：随着 12 月 23 日，腾讯以中期股息形式派发京东股票，腾讯的投资策略可能会发生变化。
Once Pony Ma fires both bazookas, there is no cash left and Pony Ma is very happy. Available capital has been allocated and the process repeats the next year. Bazooka number one earns 65% annualized return on capital invested and the bazooka number two – 35%. What a terrible business – as Mohnish sums it up. He also adds: It would not surprise me that if we look ten years or fifteen or twenty years from now that it’s the most valuable on the planet.
- terrible – 可怕的、令人骇然的
Pony Ma and the management of Tencent seem to have been buying much better money machines over time than those in a quoted paragraph. They have been generating between 20% and 32% on investment over the last five years.
In the case of Tencent, we would be currently buying the company for a Price / Cash Flow of 22.14 which for an enterprise with such a range of growth possibilities is fair if not too little. Market Insider experts Tencent to grow its EPS with 19.11% CAGR till 2025. Another metric worth looking at is the Price / Sales ratio which for Tencent equals 6.96, slightly lower than for Meta.
Tencent is currently navigating through high waves of bad sentiment related to the Chinese government’s regulatory pressures. The situation is ongoing and details and effects on the company are unknown. However, as one of the greatest investors of all times, Warren Buffett, once said: The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.
- operating table – 手术台
Tencent has been on the operating table for some time. The opportunity to acquire a wonderful business might be here and now.