Tencent Is Licensing Its Games IP For Consumer Goods – Tencent Holding Ltd. ADR (OTCMKTS:TCEHY)

Entertainment giant, Disney (DIS) licenses its intellectual property [IP] and helped sell $56.6 billion worth of consumer goods last year. Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) is also an entertainment company but it is focused more on video games. Tencent is now going to license merchandise/consumer goods based on its mobile games IP. JD.com (NASDAQ:JD) will sell toys, apparel, accessories, collectibles and other consumer products based on hit Tencent games like Honor of Kings and Contra Return.

(Source: Tencent/JD.com)

Tencent already generates the most amount of annual revenue from global video games sales. The China-only Honor of Kings mobile MOBA game is the world’s top-grossing mobile app, which achieved $810.47 million in Q1 2017 revenue. However, the extra income from licensing its games IP could generate a 9-figure new annual revenue. Tencent needs this extra money from merchandise licensing to help meet its now substantial debt obligation ($15 billion in long-term debt).

Perhaps two years from now, Tencent will be listed as one of the world’s top licensors.

(Source: Advanstar.com)

Other Video Games Publishers Are Doing It

Activision Blizzard (ATVI) also put up its consumer goods division earlier this year to monetize its video games IP. Rovio, the developer behind the Angry Birds mobile game franchise, has a long-running consumer goods licensing business.

It makes perfect sense for Tencent to also monetize its mobile games IP via consumer goods licensing. Some people love Mickey Mouse-related consumer goods and others love video game heroes-related items.

Video games now generate more annual revenue than Hollywood films. Tencent is right to start licensing its video games IP to third-party vendors of retail goods. There are ready buyers for them. Honor of Kings’ massive commercial success in China means there are hundreds of millions of players who are potential buyers of Honor of Kings-related products.

Mutual Benefits

JD.com is the second-largest online retailer in China. Tencent is the largest stakeholder of JD.com, it owns 21.25% of it. Choosing JD.com to be its first partner for merchandise licensing is a judicious move for Tencent. These two are in it for the long haul.

Tencent gets to monetize its freemium games beyond mere in-app purchases, and JD.com has new products for direct selling to its 226 million customers. Anything that helps JD.com is also to the benefit of its largest stakeholder, Tencent.

Some of those 55 million Chinese daily active users of Honor of Kings in China are going to spend more money to buy t-shirts, mouse pads, bags, and other items to tout their love for Tencent’s mobile MOBA game. Tencent needs the licensing money to help offset future weakness in Honor of Kings’ revenue stream. Tencent was forced last July to limit daily playtime of Chinese players under 18 years old to avoid being reprimanded by Chinese authorities. Reduced playing time probably means lower chances of players doing in-app purchases.

My guesstimate is that Tencent will probably charge 10% to 20% royalty/license fee on every games-related consumer item that JD.com will sell through its online portal. Chinese players spent $10.2 billion on Tencent-branded PC/mobile games. I can safely say that licensed consumers goods (related to Tencent’s games) can likely do $1 billion/year sales. Twenty percent license/royalty fee of that is $200,000,000. We also have to remember that Tencent is also the publisher of popular Western-made mobile games like Clash of Clans, Clash Royale, and Candy Crush Saga in China.

I expect the JD.com deal also covers these Tencent-published China versions of Western games. Tencent controls 84% of Supercell, maker of Clash of Clans and Clash Royale. It can license Supercell’s IP for the China market without any trouble.

JD.com has a global online platform, joybuy.com. Tencent is also working hard to release international versions of Honor of Kings. We can expect that the merchandise licensing partnership between Tencent and JD.com is not limited to the Chinese market.

Conclusion

I heartily endorse Tencent for long-term/growth investors. Tencent used to monetize only through sales of virtual currencies/items to players of its video games. Tencent has now leveled-up to monetizing via real-world consumer goods. Merchandise licensing is an easy way to extract more money out of video games fans.

Going forward, I expect Tencent to eventually license its IP for TV show and movie purposes. Activision and Rovio did it. Tencent can also certainly do it. For almost two decades now, Hollywood producers made hit movies out of video game titles. Tencent does not have Marvel heroes or Star Wars characters.

However, Tencent has hundreds of millions of fans loyal to its Honor of Kings, Clash of Clans, Clash Royale, and League of Legends video games. If a person is willing to spend $200 on Honor of Kings’ virtual currency/items, he won’t mind buying a $20 t-shirt or a $10 movie ticket related to it.

Disclosure: I am/we are long TCEHY, ATVI, DIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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