Tencent (NASDAQOTH:TCEHY) recently announced that it will invest about $318 million in Bilibili (NASDAQ:BILI) by buying 25 million newly issued Class Z shares at $12.67 per share. The investment will give Tencent a 12% stake in the Chinese tech company, which went public in March.
This move might seem like another scattershot investment for Tencent, which owns stakes in a wide range of companies across multiple industries. But if we look closer at this deal, we'll realize that it's a calculated move that directly complements Tencent's recent restructuring.
Why Tencent needs Bilibili
Bilibili generates most of its revenue from popular mobile games like Fate/Grand Order and Azur Lane. It also serves digital content -- like streaming videos and online comics -- on its mobile app and website. The company's revenue rose a whopping 76% annually to 1.03 billion RMB ($155.1 million) last quarter, but it remained unprofitable with an adjusted net loss of 19.5 million RMB ($2.9 million).
Bilibili claims that its gaming revenue -- which accounted for 77% of its top line last quarter -- will drop to 50% within three to five years, as it generates more revenue from live video streaming, value-added services, and digital ads. Pivoting away from the Chinese gaming market could be a smart move, since the industry currently faces a temporary suspension on new video game approvals and tighter regulations.
Monthly active users (MAU) rose 30% annually to 85 million last quarter. The company claims that Gen Z users (born between 1990 and 2000) accounted for 82% of that total. 85 million is a tiny number compared to Tencent's audience of over 1 billion WeChat MAUs. However, investing in Bilibili gives Tencent a foothold with Gen Z users, many of whom are shifting away from WeChat to other social media platforms.
Tencent's investment in Bilibili can also widen its moat against ByteDance, which is hitting Tencent on multiple fronts with popular apps like the news aggregator app Jinri Toutiao and the popular short video apps Douyin (also known as Tik Tok) and Xigua. Douyin, which has over 500 million MAUs, is considered the top short video app for Gen Zers in China. Tencent also owns a short video app called Kuaishou, but it only reaches about half as many MAUs as Douyin.
Investing in Bilibili will also expand Tencent's video game and Penguin esports ecosystem. Bilibili owns a professional League of Legends team and a new Overwatch league expansion team. Tencent owns League of Legends publisher Riot Games, as well as a stake in Overwatch publisher Activision Blizzard. Tencent also owns stakes in the Chinese video game streaming platforms Douyu and Huya, the latter of which also owns an Overwatch team.
How this complements Tencent's restructuring
Tencent recently restructured its seven business units into six units. It retained four of its existing groups -- corporate development (investments and incubators), Weixin (WeChat), interactive entertainment video games), and technology, and engineering.
It then added a new cloud and smart industries group to expand Tencent Cloud, and merged its online media, non-WeChat social media, and mobile app groups into the new platform and content group. Tencent's main strategy for the platform and content group is to prioritize the growth of its cloud and digital content businesses, while pivoting away from its struggling video game business.
For now, the platform and content group's core growth engines are Tencent Video, which has over 500 million MAUs and 63 paid subscribers, Tencent Music, which has over 800 million MAUs (and is set for a U.S. IPO), and its QQ and Qzone social media platforms. It also offers a wide range of online comics, books, and other digital content.
Therefore, Tencent's investments in companies like Bilibili, Huya, and Douyu might initially seem random, but they're part of a bigger efforts to expand its ecosystem with younger users and fend off ambitious challengers like ByteDance, which is gearing up for its own IPO next year.