Tencent Holdings Ltd (0700)

[specuvestor]

Except for the fact that both are not majority Chinese owned that controls Chinese digital payment. Politics and security could be more important factors next year as Xi position himself for next 2X 5 years.

Pony Ma has not been flamboyant or tried to be outstanding since their IPO, and have been quietly compliant with what government requested. I would think Tencent is on better footings than most other chinese internet companies.

"Law of large numbers"- google and netflix are stuck as they have held captive the Europe, North America, Middle East and Asia Pacific markets. Its is very hard for them to grow much bigger unless they start charging more especially in Netflix case.

Alibaba and Tencent on the other hand have the chance to break into these markets, the first warfront will be Asia pacific and SEA. So their "ceiling" is presumably higher. But their home government is not supporting them and instead is trying to promote their own SOE who are inferior to the 2 and uncompetitive to the Western giants.

The fact these two Chinese giants can still fight with both hands tied to their back shows how good they are, albeit because they are chinese companies with a chinese workforce who work like horses and are smart. The stars are nearly aligned for the chinese (innovative, astute management and hardworking, tenacious workforce) except they now have a government whose business sense rivals Mr Magoo

[weijian]

Going forward, I believe that there could be a deliberate effort for Tencent to slim down. That would mean that we could expect more spinoff and possible sale of some of their investment portfolio?

If the valuation of their investment portfolio valuation stays elevated while the spinoff-sale is happening, Tencent may be interesting at this level. A slim down and more focus Tencent may be afforded an even higher multiple.

OWH
www.weightedresearch.com

Wechat is the defacto digital distributor of China. This means when Tencent has a stake in you, traffic onto your service is well facilitated by them, compared to let's say, your competitor whom does not have similar privileges.

Let's say an investment is held at a 15% discount to its actual public value due to the holding company discount. A spin off cuts away this symbiotic relationship and that means its actual public value will drop (whether in terms of moats and also how the market values them). When the Tencent shareholder gets the spin off shares, he will get a weaker company with lower valuation, which may be worst off than the 15% holding company discount.

Of course, history has showed that the converse may be true as well. Wechat might have more chances of monetization now. Also the spin off companies may get more more anti fragile after that and then proceed to grow multiple folds in the longer run.

[Wildreamz]

..

A spin off cuts away this symbiotic relationship and that means its actual public value will drop (whether in terms of moats and also how the market values them). When the Tencent shareholder gets the spin off shares, he will get a weaker company with lower valuation, which may be worst off than the 15% holding company discount.

..

Fair assessment.

Conventional wisdom in traditional free markets, doesn't necessarily apply in China; this seems to be the norm rather than the exception nowadays.

[specuvestor]

(Bloomberg) --Tencent Holdings Ltd. has sold $3 billion of shares in Singaporean online gaming and e-commerce company Sea Ltd. as it seeks funds for new initiatives and philanthropic efforts to aid wealth redistribution.
The Chinese internet giant priced 14.5 million shares in Sea at $208 each, the bottom end of an indicative range, according to terms of the deal obtained by Bloomberg News.

The offer price represents a discount of 6.9% to Sea’s close on Monday. The stock fell as much as 9.4% in early New York trading on Tuesday and has slumped more than 44% from a high hit in October.

Less than a month ago, Tencent announced a plan to hand out more than $16 billion of JD.com Inc. stock as a one-time dividend in an effort to divest most of its stake in China’s No. 2 online retailer. The surprise move was seen as being in response to Beijing’s push to curb anticompetitive behavior and open up closed ecosystems.

Tencent is reducing its holding in Sea to 18.7%, it said in a statement. The divestment will provide the Shenzhen-based company with “resources to fund other investments and social initiatives, while retaining a substantial majority of its stake in Sea and continuing to benefit from the company’s future growth,” it said.

In August, Tencent doubled the amount of money it’s setting aside for social responsibility programs to 100 billion yuan ($15.7 billion) as Beijing forges ahead with its “common prosperity” campaign that includes income regulation and redistribution.

Chinese tech stocks have been battered by a year of regulatory action, spanning sectors including online education, gaming and food delivery, slowing growth at tech stalwarts like Tencent and Alibaba Group Holding Ltd.

Tencent has agreed not to sell further Sea shares for the next six months, the terms show.

Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley are arranging the sale.

I think this might be one of first interesting unintended consequences of regulation. Unintended cause it is probably positive to stock price over mid-term though strategically might not be.

Tencent to give US$16.4 billion JD.com stake to shareholders as dividend
https://www.channelnewsasia.com/business...nd-2397241

:Chinese gaming and social media giant Tencent will distribute most of its JD.com stake worth HKUS$127.69 billion (US$16.37 billion) to its shareholders as a dividend, no longer remaining the e-commerce firm's top shareholder.

Tencent said on Thursday it was the right time to transfer its stake given that JD.com has reached a stage it can self-finance its own growth. The owner of WeChat will see its stake fall to 2.3per cent from around 17per cent.

[dreamybear]

...Tencent is reducing its holding in Sea to 18.7%, it said in a statement. The divestment will provide the Shenzhen-based company with “resources to fund other investments and social initiatives, while retaining a substantial majority of its stake in Sea and continuing to benefit from the company’s future growth,” it said.

In August, Tencent doubled the amount of money it’s setting aside for social responsibility programs to 100 billion yuan ($15.7 billion) as Beijing forges ahead with its “common prosperity” campaign that includes income regulation and redistribution...

(note : the following post is from the Alibaba thread)

In the stock market, the company is now valued at $302 billion.

Its e commerce division (local+ global) had USD 10 billion profits in the latest half of financial results (which factors the Chinese $2.8 billion Fine). Assuming the first half performance is replicated in 2H, this means Alibaba is currently selling at 15 x P/E. This excludes the future growth potential of its cloud computing, international e commerce, logistics segments.

Wonder what the market or I am missing. Probably market participants are now afraid that its China e commerce division will perform worse because Alibaba is in the CCP's wrong books and CCP may wipe off their billion in annual profits ....

In light of the current regulatory environment, my valuation criteria for Chinese tech stocks is pretty much the same as the other decent stocks, i.e. try to pay less than 10x P/E, net cash, etc etc. In other words, I do not apply any "tech stock premium".

My reasoning is the earnings or profits may not be fully attributable to shareholders as part of it may be used for social responsibility purposes. This is other than there could be new regulations impacting the current as well as future potential earnings. 

At the same time, I am not factoring in any discount factor into the earnings attributable to shareholders(e.g. 100% - 80% shareholders vs 20% social) because the earnings will probably grow (esp for stocks like Alibaba / Tencent) - so the two factors(discount vs growth) net off each other.  

I am still waiting on the side lines and may well miss valuable opportunities, but I comfort myself in that the 20 slots in my ticket are mostly used up.

[weijian]

I hope it is clear by now, in its current form with the available public information, a valuation exercise is not the appropriate method to make a decision on whether to invest in Chinese mega TECH caps.

Doesn't valuation matters? Of course it does.
Is cheap valuation for a business with such attractive moats the reason to invest? Of course, it is not!

The alpha Chinese TECH companies have dropped from their Feb2021 ATH due to regulatory actions. If the regulatory actions are not anticipated to stop, any form of averaging down is catching a very deep falling knife, and has proven to be so this far. Equities are a feature of Capitalism and the same treatment one commonly use for capitalist markets, cannot be used (wholesale) for a pseudo-capitalist China.

[CY09]

However when it becomes too hard to value, many investors are going to avoid investing. And when no investors come in to raise funds, chinese companies are going to find capital scarce.

That will be an interesting occurrence and I wonder how will Chinese companies be funded. Will everything have to go through their 4 central state banks? It is also worth noting many of the smaller corporations such as Tencent Music, Netease, Huya are still in their cash burning stage and will need funds to continue their growth. Who will sponsor their cash burn growth stage, listing in HK exchange is one idea but if globally investors are too scared to invest in China, everything has to be funded locally. And now local chinese investors are scared stiff by their failed investments in property companies.

Its quite funny all these mess was created by the premier himself

[Wildreamz]

Another way to finance it: once valuations get too low, they get bought out by bigger players such as BBAT (who has real profits and cash flow) at a huge discount. 

With the big caveat being that the Chinese government's anti-trust arm allows that. If they don't allow, then the Chinese SOEs will be the ones privatizing (nationalizing?) them.

[dreamybear]

However when it becomes too hard to value, many investors are going to avoid investing. And when no investors come in to raise funds, chinese companies are going to find capital scarce.

That will be an interesting occurrence and I wonder how will Chinese companies be funded. Will everything have to go through their 4 central state banks? It is also worth noting many of the smaller corporations such as Tencent Music, Netease, Huya are still in their cash burning stage and will need funds to continue their growth. Who will sponsor their cash burn growth stage, listing in HK exchange is one idea but if globally investors are too scared to invest in China, everything has to be funded locally. And now local chinese investors are scared stiff by their failed investments in property companies.

I do not have all the figures but I was just thinking perhaps other than the state banks, the state might be expecting cash rich or big companies to make some contribution moving fwd and this may be part of the reason(besides anti-competitive concerns) why we see Tencent divesting.

While the contributions from various sources(state/state banks, giant companies, China/HK listing) may be unable to make up the required amount in full, I think the govt may also be looking at rationalizing the private sectors thru' its policies, e.g. weeding out unsustainable/inefficient companies, M&A.

So I think it is a combination of various factors that will come together to sustain the Chinese economy and move it fwd. 

In any case, this is an interesting source to keep up-to-date on policies : http://english.www.gov.cn/policies/policywatch

[weijian]

This doesn't look good.

Tencent faces record fine over WeChat payments, WSJ says

Tencent Holdings faces a record fine after China's central bank discovered its WeChat Pay had violated money-laundering rules, the Wall Street Journal reported, citing people familiar with the matter.

The People's Bank of China found Tencent's payments platform had allowed the transfer of funds for illicit purposes such as gambling, the newspaper reported. WeChat Pay was also judged non-compliant with other rules that required Tencent to identify users and merchants transacting on the platform, the Journal said

https://www.businesstimes.com.sg/banking...s-wsj-says