In this article, we are looking into why I am building a position in Tencent when there is heavy selldown from fund managers and retail investors as well.
Why is Tencent stock price down?
In my previous post, I have mentioned why China’s technology stocks took a beating. China announced that it will go through 5 years of regulation on technology companies which include turning education companies into non-profit organizations. Education companies contribute a lot of revenue to Tencent’s online advertisement platforms. If they become non-profit organizations and advertisements on tuition are banned, there will be lesser revenue for Tencent.
Tencent was sued by Bytedance for blocking links and this is one of the anti-competition issues the authorities are trying to rectify. This has been effective for Tencent to protect its market shares. Alibaba is prevalent in blocking links and merchants to work with competitors. The government is going to crack down on this anticompetitive behavior to allow a fair practice.
Tencent’s gaming sector is under fire as well. Martin Lau, president of Tencent mentioned,” We should expect … in the near future, more regulations should be coming.” The state media mentioned that online games are a form of addiction.
Growth sectors
From the interim report, Tencent provides PaaS and SaaS technologies to assist digitalization for public services and traditional industries. Tencent is ranked first in China in terms of video cloud solution revenue. Tencent has SaaS tools such as WeCom, WeDoc, WeDrive to support better collaboration between enterprises.
The fintech sector will remain one of the key growth sectors, the daily payment frequency grew at a healthy year-on-year rate. Tencent is charging a very low or zero payment take rate in certain cases to support the growth of enterprises. This trend may likely be enforced further by the government to provide service to the country.
VAS revenue has 20% growth, Online Advertising has 10% growth and FinTech and Business Services have 40% growth. If 10% of online advertising comes from the education sector, this will mean approximately RMB 2 billion will be lost. Meanwhile, Tencent is diversifying its online advertising to grow other customers from autos and consumers staples.
Valuation
We believe Tencent is still worth around HKD 700 per share. Recently, we bought 300 shares of Tencent at HKD 436 per share. This is a single digit in our portfolio and we are planning to build it up to 10% of our portfolio. We will only enter in tranches. With every drop of 20%, we will enter another tranche. If you (stock price) dare to drop, we will dare to enter. I have a friend who quotes me as “reckless” when he has a huge position in Tencent.
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