WeChat: Tencent's not so secret weapon

Just two years ago, Tencent Holdings Ltd introduced a mobile instant-message application called WeChat. It already has 200 million users, including Lai Jingkui, a teacher in China's southern Zhuhai city, who uses the Drift Bottle function to find friends.

While Lai, 23, is still looking, Tencent has found a hit. WeChat's user base could double to 400 million within three years, providing the chance for China's biggest Internet company to boost revenue by adding mobile e-commerce and location-based advertising, Core Pacific-Yamaichi International Ltd believes.

That's welcome news for Shenzhen-based Tencent, which last year faced its second-slowest annual profit growth since it listed on the Hong Kong Stock Exchange in 2004. The problem? A shift in Internet usage from personal computers to smartphones and tablets.

The trend is pulling users away from Tencent's offerings toward competitors including Sina Corp's Twitter-like Weibo, which built a user base of 424 million as of September. Sina was projected by analysts to turn from a loss to a profit in 2012. Net income growth this year is estimated to be more than double Tencent's.

Tencent is counting on WeChat to close the gap.

"Implementation of WeChat will help Tencent get into a new growth stage, as the company has traditionally relied on online games," said Kevin Tam, an analyst at Core Pacific-Yamaichi in Hong Kong. "WeChat can replace online games as a growth driver in coming years."

Tam projects the free WeChat app will begin contributing to sales in 2013. He hasn't forecast the amount of sales yet.

Tencent, founded in Shenzhen in 1998 with an instant-messaging service called QQ, started its QQ Game Portal in 2003. For the past decade, online games such as Dungeon & Fighter and Cross Fire propelled Tencent's growth and contributed 56 percent of revenue in 2011. Now, casual gaming on smartphones and tablets is eating into the growth of gaming on PCs.

Tencent's net income is projected to increase 24 percent to 12.6 billion yuan ($2 billion) this year, according to the average of 19 analysts' estimates compiled by Bloomberg. That's down from 27 percent in 2011 and less than half the 56 percent profit growth in 2010. It would be the slowest pace since a 9 percent gain in 2005, according to data compiled by Bloomberg.

Meanwhile, Sina is projected to rebound from a loss and post a net income of $25.7 million in 2012, according to the average of 17 analysts' estimates. In 2013, growth in profit will outpace Tencent's projected 28 percent pace, rising 64 percent to $42 million, according to the estimates. Sina's market capitalization is $3.1 billion, compared with Tencent's $59.7 billion, according to data compiled by Bloomberg.

As people spend less time with their PCs, WeChat, known as Weixin in Chinese, gives Tencent a way to capture the explosive increase in the use of tablets and smartphones.

Despite its early lead in the mobile shift, Sina's advertising-driven business model ultimately won't keep pace with Tencent's e-commerce capability, said Cynthia Meng, a Hong Kong-based analyst with Jefferies Group Inc.

"Sina's mobile traffic is large but we're talking about positioning for mobile monetization," Meng said. "The first opportunities in mobile will come from games and mobile commerce" at which Tencent has a distinct advantage, she said.

Tencent gained 60 percent in Hong Kong trading last year, surpassing the 23 percent gain in the Hang Seng Index. Sina shares have declined 9 percent in New York.

Its core functions allow WeChat users to send texts, images or audio messages. The audio message function is similar to an application from WhatsApp Inc. WeChat's photo-sharing function called "Moments" operates with a timeline and cover-photo layout similar to that of Facebook Inc, which had more than 1 billion monthly active members as of Sept 30, including 604 million mobile users. The app's video conferencing ability is likened to Microsoft Corp's Skype.

Twitter Inc's messaging and social media service had more than 200 million monthly active users, the San Francisco-based company said on its website on Dec 18.

WeChat goes beyond those functions for keeping up with existing friends, providing ways to connect with new ones. The Drift Bottle function lets a user throw or pick up a random audio or text message. The interface has a picture of a stretch of beach under a blue sky, where users can pick up a bottle as a virtual hot air balloon drifts overhead. The user can respond to the message or throw it back.

Lai said he likes to use Drift Bottle daily even though it hasn't led to any meaningful new friendships yet.

"It's very unlikely for me to keep in touch with people I meet using the Drift Bottle," Lai said. "People usually just send back one response and the conversation ends there."

While the bottles go at random to any user around the world, there's also a way to meet people closer by with a function called Look Around that shows who's using the app in the vicinity. Users who meet each other this way can exchange contacts wirelessly by shaking their phones.

"WeChat is a killer app," said Alicia Yap a Hong Kong-based analyst at Barclays Plc. "WeChat seems to capture human behavior. Once people use it - and all their friends use it - they need to continue to use it."