Tencent share price dropped 7.8% on 26 Jul 2021. And experienced another 9% decline on the following day.
Since its high of HK$757 on 11 Feb 2021, it has tumbled 43% to HK$446 by 28 Jul 2021 (at point of publishing).
Although it looks like the stock market has just crashed but no. Tencent’s decline was pertaining mainly to the Chinese stocks and especially big powerful tech companies that have been receiving the authorities’ wrath.
Those who invested in Tencent are wondering when this carnage will be over. Some may even be thinking about averaging down their position but are wondering if it is a good idea as they watch the stock slide.
Those who do not have the stock may want to take the opportunity to buy. Again, should you consider buying, given that the Chinese government may do even more damage to the company? And how should you value Tencent since its long term value has been lowered by the intervention?
I hope to give you a clearer idea in this article.
Tencent is a behemoth
Most investors should know Tencent well enough, hence I was reluctant to write an essay for its introduction.
Basically, Tencent owns the ubiquitous WeChat that has 1.2 billion users, is the largest game company in the world by revenue, and commands a 39% market share in terms of digital payments in China.
It has made a lot of investments that make it looks like a tech ETF – some notable investments include Tesla, NIO, Meituan, JD.com, Sea, Pinduoduo, Snap, Reddit, Fortnite, Spotify, Universal Music Group, and Futu.
It is so hard to keep track of Tencent’s investments and know the true combined value that I think it is likely under accounted for.
But wouldn’t the valuation of Tencent be much lower now?
Definitely.
Here are three things that would lower the valuation of Tencent.
1 – Tencent Music’s loss of its exclusive music rights
Tencent Music has a monopoly in the China market with a 88% market share via 3 streaming apps – KuGou, QQ Music, KuWo. It was obvious they became a target and were ordered to give up the exclusive music rights.
Competitors may come in and compete better. But is it that easy to just take market share from incumbents? Tencent Music might end up retaining half the market share probably.
That said, Tencent Music raked in RMB29.15 billion in 2020 while Tencent’s revenue was RMB482 billion. That’s 6% of Tencent’s revenue. Moreover, Tencent has a 55% stake in Tencent Music and won’t take the full impact.
2 – Potential impact of policies on its investments
The Chinese authorities have moved to protect the food delivery riders by issuing new policies such as paying above minimum salaries for these employees. Meituan share price tumbled 14% on that news as rising costs mean lower profits for shareholders.
Tencent has about 20% stake in Meituan and Meituan doesn’t contribute to Tencent’s revenue because it is not a subsidiary of Tencent. The only way Meituan can affect Tencent is its share price performance or its earnings, depending on how it was treated in Tencent’s balance sheet. We won’t exactly know because Tencent doesn’t break down its investments.
3 – Scrutiny of Tencent’s FinTech
The FinTech arm of Tencent is also under scrutiny by the authorities. Similar to Ant Group, Tencent was ordered to set up a new financial holding company and be subject to financial regulations in China.
I see it as a common pain for both Ant and Tencent, the two biggest fintech companies so the playing field hasn’t shifted much – common misery. The banks may be happy for now, but I don’t think they can capture much market share from the top two players. The only impact is that the profits will be lower due to the increased costs of running as a financial holding company.
Most importantly, Tencent generated more revenue from non-fintech businesses – games, social media and online advertising – which represented 72% of its revenue in 2020.
But will the Chinese government kill Tencent by breaking it up or make it state-owned?
Investors may also fear that the government could label WeChat a monopoly and try to curtail its power. In fact, Tencent has stopped accepting new user registration for the time being to straighten out the new privacy and data security laws.
Also, would the Chinese government accuse Tencent of teaching the kids bad values through their games?
I am not a political expert nor an assistant to a Politburo member. Hence, take my analysis with a pinch of salt.
My view is that China needs its big tech in order to compete on the world’s stage. It would be detrimental to kill off their capabilities so I don’t think it would happen. For example, the authorities asked for help (or should I say ordered) from Ant and Tencent to increase the adoption of its digital currencies because they had the technology and the reach. The government is not going to kill them. They just want the tech giants to be obedient, loyal and exhibit good values to society.
Pony Ma is unlike Jack Ma in the sense that he is a quiet guy. Quietly building his empire and at the same time abiding by the government’s rule. He has been in this game long enough that he knows how to survive this. As for Jack Ma, he has long retired from Alibaba and has since kept a low profile. He also knows how to retreat. Alibaba will survive this too.
Everyone will just kowtow to the Chinese government.
But Tencent is so expensive to buy per lot
Tencent has a lot size of 100 shares. Even at a share price of HK$457, you need about S$8,000 to buy.
The good news is that you can consider Phillip Futures CFD where you can just buy 1 Tencent CFD share. You don’t own the share outright but it is useful enough to give you the same exposure to the stock and make it affordable to smaller investors.
There’s no commission so it doesn’t eat into your profits when your positions are smaller. Check out the free platform demo here.
But wouldn’t the share price go lower?
That is definitely possible. But I am a long-term investor and don’t profess to have the ability to tell where the bottom is.
And I am prepared to average down too. The trick is not to use up all your capital but pace it over time to add up your position. Dollar cost averaging does wonders during a crash – you get to buy cheaper and cheaper.
Using Phillip Futures CFD can allow you to average down more frequently by breaking it down into smaller numbers of shares each time. Open a free account here.
Conclusion
I always hear people say I will buy when the share price comes to this level. They seldom buy when it happens. The reason is simple – a falling share price usually comes with bad news and investors get spooked and lose the confidence to buy when the time calls for it.
Most investors expect to get a good deal during good times – unker will say wait long long. Investors must know that buying cheap almost always comes with fear and uncertainty.
During good times, investors like to quote Warren Buffett and one of which is, “be fearful when others are greedy and be greedy when others are fearful”. Most investors talk only but never do.
We saw that last year during the Covid crash. Many were spooked, saying this time is different and the economy will suffer, the recession is looming, people are losing jobs, companies are closing, roads are empty, yada yada yada. Those who took action to buy despite the fear were generously rewarded. The same situation played out during crashes in the past. Fortune favours the bold.
But this is not an invitation to trade. I wanted to bring it to your awareness about your investing behaviour. If you have not been achieving success in investing, it might be because you mainly buy during the good times and rarely during the bad times.
This article was written in collaboration with Phillip Futures but opinions belong to the author.
