Two big deals for Tencent Holdings support valuation

First, on January 15, China’s Tencent Holdings (TCEHY) announced that it would partner with privately-owned Lego to develop a Lego streaming video zone for children on Tencent’s video platform and create Lego-branded games for Tencent’s gaming network. (Tencent is the world’s biggest gaming company. The stock, Asia’s most valuable by market capitalization, is a member of my long-term 50 Stocks Portfolio. It’s up 127.89% as of the close on January 29 since I added it to the portfolio on February 14, 2017.)

The deal matches one that Mattel (MAT) struck last year with Chinese e-commerce giant Alibaba Group (BABA), a Tencent competitor at the top of China’s online universe. (Alibaba is a member of my Jubak Picks and 50 Stocks Portfolios. The shares are up 233.43% in my 50 Stocks Portfolio since I added them on February 8, 2016, and top 142.17% in my Jubak Picks Portfolio since I added them on October 26, 2015.)

The deal is a good one for Lego, which has a 3% share (Mattel has only 2%) of the $31 billion Chinese toys and games market. Much of the market for building toys is occupied by local companies making versions of Lego brick sets. The tie-up with Tencent should help Lego build market presence in the Chinese market. The company opened a factory in Jiaxing in November 2016. Lego sales in China grew by 25% to 30% in 2016.

It’s also a good move by Tencent since it comes as China’s population of children is about to explode thanks to the continued relaxation of the country’s one-child policy. Nearly 12 million babies were born in the first eight months of 2017 in China and about 52% of those were second children.

Second, today Tencent and Alphabet (GOOG) announced a deal to cross-license their portfolios of patents to each other. I think the deal is more valuable to Tencent than to Alphabet. Tencent has only a 5% share in the Chinese search market through its search engine Sogou. Adding technology from Google could enable Tencent to improve its search on Sogou and on its WeChat app, which has 800 million monthly active users, and move up in China’s search market. Alphabet’s video technology from YouTube, the top video sharing platform in the global market, could also help Tencent grow its video platform. Tencent Video is in fourth place in the Chinese market with a 15% share.

But the advantages don’t all flow one way. Tencent’s WeChat technology could help upgrade the lagging Google Talk and Google’s Android Pay could learn something from WeChat Pay, the second-most used mobile payment platform in China.

Given Tencent’s hefty valuation, it ‘s good to see the company aggressively attempting to grow its revenue stream.