Is it time to catch the global stock market’s biggest falling knife?
For watchers of Tencent Holdings, whose largest shareholder is South Africa’s Naspers, it’s an increasingly pressing question. The Chinese Internet giant’s record-breaking selloff is getting worse, with Thursday’s 6.8% rout bringing losses since late January to US$252-billion — by far the biggest wipeout of shareholder wealth worldwide. The stock, one of the most widely held in emerging markets, has tumbled for an unprecedented 10 straight sessions.
As investors around the world debate whether the best days are over for the tech-led boom in global equities, Tencent has emerged as a key market bellwether. The company’s more than 67 000% return from its 2004 initial public offering through to January trounced that of every other large-cap stock worldwide, and its slide this year presaged a steep drop in tech shares from Tokyo to New York. Some money managers say it’s too soon to call a bottom.
“While it’s a good company and we obviously still like it, at the moment it’s the proxy of all the things investors want to avoid,” said Virginie Robert, the founder and president of Paris-based Constance Associes, whose global tech fund beat 99% of peers tracked by Bloomberg this year. Robert, who has an underweight position in Tencent, said she’ll refrain from adding to holdings until the company provides more clarity on its business outlook.
Jane Yip, a spokeswoman for Tencent, didn’t respond to requests for comment.
Founded by billionaire Pony Ma in 1998, Tencent had until recently captivated investors with its massively popular online gaming business, payments system and WeChat social networking platform. The Shenzhen-based company’s integral role in the lives of hundreds of millions of Chinese helped propel average annual earnings growth of about 48% over the past decade, faster than Apple’s 35%.
Sustainable?
Now questions are mounting over whether Tencent’s growth is sustainable. That’s partly because of macroeconomic concerns, including a slowing Chinese economy and a weakening yuan.
But the biggest worry for many observers is regulatory meddling from Beijing. The company’s cash cow — online gaming — has become a liability for the stock after an industry-wide government crackdown left the business, which accounts for about 40% of Tencent’s revenue, clouded in uncertainty. The country halted approvals for new games in March and authorities have given little indication of when the ban will end.
Policy makers are also tightening restrictions on Tencent’s fast-growing Internet finance business as they try to reduce systemic risks in an economy saddled with record levels of debt. The regulatory squeeze has contributed to a 20% drop in analysts’ 2018 earnings estimates since February.
Tencent is taking steps to diversify. The company announced a reorganisation this month, elevating its cloud computing business to a level on par with gaming and WeChat. It has also invested billions in start-ups doing everything from ride hailing to e-commerce.
Tencent has been buying back small amounts of stock, though its leadership hasn’t commented on the recent losses or reported adding to holdings in their personal accounts. The company repurchased the equivalent of about $108-million of shares from 12 September through to Thursday, regulatory filings show.
Bulls argue that this year’s challenges have done nothing to threaten Tencent’s dominance in its key lines of business and that the stock will rally once regulatory and economic headwinds fade. Despite falling earnings forecasts, analyst share-price targets imply a more than 60% gain over the next 12 months.
“We feel Tencent is as important as ever,” said Denis Barrier, San Francisco-based co-founder and CEO at Cathay Innovation, which manages $1-billion. The stock rout “is not going to change the position of its market share”, Barrier said.
Still, even some long-term bulls are wary of piling in. Tencent’s 12-month forward price-to-earnings multiple has dropped from about 42 to 23, but it’s still higher than when shares bottomed after major declines over the past decade. Facebook’s multiple is 17, while Alibaba Group’s is 22.
“They are cheap,” said Mitchell Green, the Santa Barbara-based founding partner of Lead Edge Capital, which manages $1.5-billion. “But what is cheap can get cheaper.” — Reported by Lulu Yilun Chen and Sofia Horta e Costa, with assistance from Mark Bergen, (c) 2018 Bloomberg LP
