Tencent Holdings Ltd (0700)

(05-10-2021, 09:24 AM)weijian Wrote: Another humongous write up for 1 of the 2 tech giants in China.

Monopolies with Growth: Tencent

Tencent has the 2nd most valuable brand in China (behind Alibaba), and the 7th globally. Their members are well connected within the CCP, they place a lot of emphasis on having a great work environment, employees give the company a 4.3-star rating on Glassdoor and customers speak highly of the company across their verticals, with even Alibaba’s executives using WeChat.

https://vineyardholdings.net/tencent/

25% base case FCF margin and 26% revenue growth rate for a base case scenario is very optimistic given Tencent hasn't even achieved 25% FCF margins for the last three years. 

On a side note, IMO, a 25% or so drop in share price of a beloved consensus stock tends to bring out the "value investors" and Buffett/Munger quotes, regardless of where the starting point of the share price was. Usually the bottom doesn't happen here but only later when nobody talks about it and deep dives get ignored. 

You can see this trend in this forum too. It's usually much quieter when the market is in the troughs. Maybe cyclone or other admins can publish some stats (e.g. # of posts over time) to corroborate or disprove this suggestion.

First major earnings announcements of Chinese Big Tech after recent regulatory clamp-downs and change in tone of the CCP:

Tencent revenue growth drops as Beijing gaming crackdown takes hold
https://www.ft.com/content/be4906f3-6215...301d6633c7

Quote: Revenues grew 13 per cent in the three months to September 30 to Rmb142.4bn ($22bn) from the Rmb125.4bn reported in the same period a year earlier. But the sales missed the average forecast of Rmb145.4bn in a Bloomberg poll, and growth was lower than the 20 per cent and 25 per cent growth rates of quarters two and one respectively.

..

James Mitchell, the company’s chief strategy officer, said he did not expect the time limits placed on minors to be extended to adults, and he emphasized the importance of gaming to China’s soft power.

..

Personally, would not like to have exposure / opinions on these.

(ex-investor)

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

Quote::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.

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.

(23-12-2021, 10:13 AM)Wildreamz Wrote: Tencent to give US$16.4 billion JD.com stake to shareholders as dividend
https://www.channelnewsasia.com/business...nd-2397241

Quote::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.

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

Both Tencent and Alibaba are great companies to own- astute mgmt who has grown a suite of products to hold captive a segment of the market and are profitable and cash flow generative. In addition, they have access to a market of 1.4 billion people.

These two are not monopoly per se but are fighting each other in different segments, so the industries are not cornered and they are creating innovative products to outdo each other. The two rivals while fighting are in fact improving themselves and becoming more profitable. In a normal capitalistic market, this would have been an ideal textbook example and these two have the chance to become world names.

However, their home market is China and from the looks of it, political will do not allow them to grow bigger than the government. The end result is that they do not become very valuable companies despite commanding a large percentage of a 1.4 billion market whose affluence is growing.

Vested in both of these names, albeit sad that the Chinese government is hampering their growth as they could be giants who eventually rule globally.

Hi CY09,

I have the same concerns. 

Hence, curious about the thought process here. Why not invest in companies, with similar growth prospects (growth rate, profitability, predictability etc.; pulling random names, say Netflix or Google), without the obvious growth ceiling?

"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

Just very quickly, I think Google and Netflix still have a lot of room to grow. Specifically, Netflix only has 30mil subs in Asia-Pacific region (https://hypercharts.co/nflx); I can easily see their total sub number double in 5 years if they execute well; and their profits (net income, gross profit etc.) will scale even faster than their subscriber/revenue growth, due to better unit economics (each dollar spent on programming, will be subsidized and monetized over a much larger subscriber base).

Back to Tencent/Alibaba, I think you are still a bit more optimistic about China's Tech giants than I am. I expect more headwinds over the next few years, from none other than the Chinese government; as well as headwinds from distrust from the international community, as China increasingly asserts their soft power overseas.

(24-12-2021, 12:30 AM)Wildreamz Wrote: Back to Tencent/Alibaba, I think you are still a bit more optimistic about China's Tech giants than I am. I expect more headwinds over the next few years, from none other than the Chinese government; as well as headwinds from distrust from the international community, as China increasingly asserts their soft power overseas.

Agreed. I think most are underestimating the shift from Jiang to Xi (4get the lost decade under Hu).

Xi is determined to move China back to the communist track vs Deng's reform agenda. A big portion will be to redistribute wealth (and hence power) from the ultra rich to the State. Whether the State will give to the people remains to be seen.

I think plenty of moves before the 20th plenum next yr - a huge digital tax perhaps?