The debut of WeChat's news feed ads is seen as an important step in unlocking WeChat's monetization capability. Brent Lewin / Bloomberg

Tencent Holdings Ltd's revenue performance last year has evoked market confidence in the company, with analysts optimistic about its prospects this year, saying its revenue from advertisements will be a new catalyst for growth.

The mainland e-commerce giant, which is due to release its annual report for the year ended Dec 31, 2014 on Wednesday, said in its interim results announcement in June last year that advertisement income accounted for 10.5 percent of the group's total revenue in 2014 - up from 8.3 percent for 2013 and 7.7 percent for 2012.

ICBC International projects that the contribution would grow to 11 percent for 2014 and 16 percent this year.

BOCOM International also said performance-based ads have been the main driver of revenue growth for Tencent in the past year, as the equity researcher forecast that such revenue would rise by 86 percent in the fourth quarter of 2014, year-on-year.

The fast growth of performance-based ads was mainly driven by the rapid development of Tencent's ads system "Guangdiantong" on the WeChat, Q-zone and mobile Q-zone platforms, BOCOM said.

Analysts predict that Tencent would gradually show its profiting potential in online advertising through its mobile communication service platform WeChat and expect further increases in a new mobile advertising model the company had picked earlier this year.

Tencent launched news feed ads on WeChat's social network platform "Moment" on Jan 25 this year, with BMW, Vivo and Coca-cola being the first batch of advertisers.

Some WeChat users are able to see and interact with the ads in their feeds on the WeChat platform.

Unlike previous online advertising, Tencent has adopted a pricing mechanism based on the cost per thousand impression (CPM) for the first batch of brand ads, with a geo-targeting option at a much higher pricing, with ads targeting Beijing/Shanghai priced at 140 yuan ($22.4)/CPM. In addition, WeChat charges a 10-percent premium if advertisers choose to target gender.

CPM refers to the cost or expense incurred for every thousand potential customers viewing the ads. By comparison, the cost per click (CPC) is an Internet advertising model in which advertisers pay the publisher (typically a website owner) when the ads are clicked.

"For WeChat, CPM-based pricing, which is also picked by Facebook and Twitter, is reasonably higher than other online advertising models, such as the CPC model chosen by other mainland e-commerce giants like Taobao.com and JD.com," said You Na, a senior research analyst at ICBC International.

WeChat's news feed ads are served when a user refreshes Moment. If there's no interaction between a user and the ads, the ads disappear after six hours of serve.

Currently, the system allows the same ads to be served to the same audience at a minimum 48-hour interval to protect user experience.

The ads can be served to a targeted audience based on user attributes and it has a social-graph-based dissemination mechanism to make the ads go viral (such as a user's interaction with the ads will increase the possibility of his/her friends receiving the same ads).

The number of active WeChat users rose by 5.7 percent to 355 million as of Jun 30 last year, month-on-month, while the user number of QQ, Tencent's core business, showed a slight decline to 808 million during the same period.

Tencent has generated most of its earnings growth from gaming and gaming-related activities in the past five years. J.P. Morgan expects Tencent to start expanding its monetization cylinder from gaming to ads to drive earnings growth in 2015.

The global banking powerhouse pointed out that, as opposed to Mobile QQ, the debut of WeChat's news feed ads features brand advertisers only, which is partly attributable to WeChat's high penetration among white-collar smartphone users on the mainland. However, it expects WeChat ads to be gradually opened up to other advertisers, such as app developers, e-commerce and online-to-offline merchants. J.P. Morgan sees this as an important step in unlocking WeChat's monetization capability through ads.

As the timing of WeChat mobile ads monetization has come earlier than expected, equity researchers at J.P. Morgan see a potential upside to Tencent's advertising performance, and forecast that the group's revenue will reach 8.9 billion yuan this year.

According to Tencent's financial reports, its revenue for 2013 reached 5 billion yuan in 2013 and 2.1 billion yuan in the first half year of 2014.

J.P. Morgan reiterated an "overweight" rating for Tencent the second day after its move to online advertising, while BOCOM and ICBC maintained a "buying" rating in their latest reports released this month.

"Development in both mobile payment and ads monetization has yet to be reflected in Tencent's share price," Hannah Li Wai-han, a strategist at leading Singapore securities company UOB Kay Hian (Hong Kong) Ltd, said. "If the profiting potential of mobile ads on WeChat is fully released, it's expected to contribute 10 billion to total revenue. In the process, we hope the stock price will reach HK$161 within 12 months."

ICBC International has set a target share price of HK$140 for Tencent within 12 to 18 months, while BOCOM has forecast HK$152 and J.P. Morgan HK$160 for 2015.

gladdy@chinadailyhk.com

(HK Edition 03/18/2015 page9)