Tencent Holdings Ltd (0700)

In terms of investor psychology and valuation, I had the same thinking as you and questioned how could Alibaba be valued at 10 times its free cash flow.

It became my core position 2 years ago. I have accumulated a paper loss of 6 digits and 2 years of opportunity cost. Conversely, I invested in US office SGX-listed REITs, other than Manulife, and earn positive returns from suffering the fall and now the rise in less than 6 months.

In both situations, I was of the view that the companies were undervalued. The market can depress a company valuation for a very long time, like tencent; tencent music and alibaba are undervalued as compared to their international peers; however shareholders have suffered heavy losses. We learnt that a news can be company specific or industry specific; but many of us have not witnessed or learnt of country specific news. China and Xi Jinping taught us a valuable lesson.

Investors sentiment can be weak for 3 years or more despite the apparent strong cashflow generated by its companies. Comparing Tencent Music (TME) and Spotify, both companies experienced a decline in share prices but spotify has recovered faster than TME despite TME being 4-5 times more profitable, cash flow generative and announcing a share buyback program earlier than Spotify

While one can say holding on will eventually yield returns, I question if the cost of locking capital is worth it. Owning China stocks seems to be very different from that of the rest of the world, it can remain low for a long period of time and despite SBB done by the company. With this context in mind, my thoughts is that to own Chinese stocks, you have to be rewarded for holding on to your conviction, dividend is a neccessity to cover the opportunity cost. No doubt, Alibaba or Tencent can be a 3-5 bagger, but if it takes too long, with too few dividends and it is your core position, I feel it is an inefficient allocation of capital.

I have continued to own alibaba stocks however, I have learnt to diversify so as not to let it become a core position. A few of my new holdings are still China but they came with the criterion that (i) it is a red chip or china blue chips and (ii) pays out 7-8% dividends in their beat down share price. Most of the red-chip are indeed undervalued but they have been for years.

I vividly recall an ICBC bull in 2016 proclaiming how the world's biggest bank in assets and profitability could pale in market cap and valuation to Bank of America. He has held onto his conviction for 7 years to this present day. Fortunately for him, ICBC continues to give significant dividends and neither has his story telling of ICBC changed. However, ICBC has maintained its valuation discount to Bank of America. ICBC is still very "cheap" even till now.

I have aptly shown that there seems to be a trend where China stocks are valued at a discount to its US and International peers.

https://valuebuddies.com/thread-5110-page-47.html

(23-12-2023, 01:42 AM)CY09 Wrote: In terms of investor psychology and valuation, I had the same thinking as you and questioned how could Alibaba be valued at 10 times its free cash flow.

It became my core position 2 years ago. I have accumulated a paper loss of 6 digits and 2 years of opportunity cost. Conversely, I invested in US office SGX-listed REITs, other than Manulife, and earn positive returns from suffering the fall and now the rise in less than 6 months.

In both situations, I was of the view that the companies were undervalued. The market can depress a company valuation for a very long time, like tencent; tencent music and alibaba are undervalued as compared to their international peers; however shareholders have suffered heavy losses. We learnt that a news can be company specific or industry specific; but many of us have not witnessed or learnt of country specific news. China and Xi Jinping taught us a valuable lesson.

Investors sentiment can be weak for 3 years or more despite the apparent strong cashflow generated by its companies. Comparing Tencent Music (TME) and Spotify, both companies experienced a decline in share prices but spotify has recovered faster than TME despite TME being 4-5 times more profitable, cash flow generative and announcing a share buyback program earlier than Spotify

While one can say holding on will eventually yield returns, I question if the cost of locking capital is worth it. Owning China stocks seems to be very different from that of the rest of the world, it can remain low for a long period of time and despite SBB done by the company. With this context in mind, my thoughts is that to own Chinese stocks, you have to be rewarded for holding on to your conviction, dividend is a neccessity to cover the opportunity cost. No doubt, Alibaba or Tencent can be a 3-5 bagger, but if it takes too long, with too few dividends and it is your core position, I feel it is an inefficient allocation of capital.

I have continued to own alibaba stocks however, I have learnt to diversify so as not to let it become a core position. A few of my new holdings are still China but they came with the criterion that (i) it is a red chip or china blue chips and (ii) pays out 7-8% dividends in their beat down share price. Most of the red-chip are indeed undervalued but they have been for years.

I vividly recall an ICBC bull in 2016 proclaiming how the world's biggest bank in assets and profitability could pale in market cap and valuation to Bank of America. He has held onto his conviction for 7 years to this present day. Fortunately for him, ICBC continues to give significant dividends and neither has his story telling of ICBC changed. However, ICBC has maintained its valuation discount to Bank of America. ICBC is still very "cheap" even till now.

I have aptly shown that there seems to be a trend where China stocks are valued at a discount to its US and International peers.

https://valuebuddies.com/thread-5110-page-47.html

You clearly shared the same concerns i did when i divested from China in 2021: https://valuebuddies.com/thread-5110-pos...#pid164909

What motivated you to hold on to core position in the last 2 years?

(i) Fear of FOMO if China U turned on its policies, (ii) psychological pain of cutting losses when you know the company is undervalued but what stands in its way is President Xi Jinping

(23-12-2023, 01:42 AM)CY09 Wrote: In terms of investor psychology and valuation, I had the same thinking as you and questioned how could Alibaba be valued at 10 times its free cash flow.

It became my core position 2 years ago. I have accumulated a paper loss of 6 digits and 2 years of opportunity cost. Conversely, I invested in US office SGX-listed REITs, other than Manulife, and earn positive returns from suffering the fall and now the rise in less than 6 months.

In both situations, I was of the view that the companies were undervalued. The market can depress a company valuation for a very long time, like tencent; tencent music and alibaba are undervalued as compared to their international peers; however shareholders have suffered heavy losses. We learnt that a news can be company specific or industry specific; but many of us have not witnessed or learnt of country specific news. China and Xi Jinping taught us a valuable lesson.

Investors sentiment can be weak for 3 years or more despite the apparent strong cashflow generated by its companies. Comparing Tencent Music (TME) and Spotify, both companies experienced a decline in share prices but spotify has recovered faster than TME despite TME being 4-5 times more profitable, cash flow generative and announcing a share buyback program earlier than Spotify

While one can say holding on will eventually yield returns, I question if the cost of locking capital is worth it. Owning China stocks seems to be very different from that of the rest of the world, it can remain low for a long period of time and despite SBB done by the company. With this context in mind, my thoughts is that to own Chinese stocks, you have to be rewarded for holding on to your conviction, dividend is a neccessity to cover the opportunity cost. No doubt, Alibaba or Tencent can be a 3-5 bagger, but if it takes too long, with too few dividends and it is your core position, I feel it is an inefficient allocation of capital.

I have continued to own alibaba stocks however, I have learnt to diversify so as not to let it become a core position. A few of my new holdings are still China but they came with the criterion that (i) it is a red chip or china blue chips and (ii) pays out 7-8% dividends in their beat down share price. Most of the red-chip are indeed undervalued but they have been for years.

I vividly recall an ICBC bull in 2016 proclaiming how the world's biggest bank in assets and profitability could pale in market cap and valuation to Bank of America. He has held onto his conviction for 7 years to this present day. Fortunately for him, ICBC continues to give significant dividends and neither has his story telling of ICBC changed. However, ICBC has maintained its valuation discount to Bank of America. ICBC is still very "cheap" even till now.

I have aptly shown that there seems to be a trend where China stocks are valued at a discount to its US and International peers.

https://valuebuddies.com/thread-5110-page-47.html

(23-12-2023, 02:55 PM)Choon Wrote:

(23-12-2023, 01:42 AM)CY09 Wrote: In terms of investor psychology and valuation, I had the same thinking as you and questioned how could Alibaba be valued at 10 times its free cash flow.

It became my core position 2 years ago. I have accumulated a paper loss of 6 digits and 2 years of opportunity cost. Conversely, I invested in US office SGX-listed REITs, other than Manulife, and earn positive returns from suffering the fall and now the rise in less than 6 months.

In both situations, I was of the view that the companies were undervalued. The market can depress a company valuation for a very long time, like tencent; tencent music and alibaba are undervalued as compared to their international peers; however shareholders have suffered heavy losses. We learnt that a news can be company specific or industry specific; but many of us have not witnessed or learnt of country specific news. China and Xi Jinping taught us a valuable lesson.

Investors sentiment can be weak for 3 years or more despite the apparent strong cashflow generated by its companies. Comparing Tencent Music (TME) and Spotify, both companies experienced a decline in share prices but spotify has recovered faster than TME despite TME being 4-5 times more profitable, cash flow generative and announcing a share buyback program earlier than Spotify

While one can say holding on will eventually yield returns, I question if the cost of locking capital is worth it. Owning China stocks seems to be very different from that of the rest of the world, it can remain low for a long period of time and despite SBB done by the company. With this context in mind, my thoughts is that to own Chinese stocks, you have to be rewarded for holding on to your conviction, dividend is a neccessity to cover the opportunity cost. No doubt, Alibaba or Tencent can be a 3-5 bagger, but if it takes too long, with too few dividends and it is your core position, I feel it is an inefficient allocation of capital.

I have continued to own alibaba stocks however, I have learnt to diversify so as not to let it become a core position. A few of my new holdings are still China but they came with the criterion that (i) it is a red chip or china blue chips and (ii) pays out 7-8% dividends in their beat down share price. Most of the red-chip are indeed undervalued but they have been for years.

I vividly recall an ICBC bull in 2016 proclaiming how the world's biggest bank in assets and profitability could pale in market cap and valuation to Bank of America. He has held onto his conviction for 7 years to this present day. Fortunately for him, ICBC continues to give significant dividends and neither has his story telling of ICBC changed. However, ICBC has maintained its valuation discount to Bank of America. ICBC is still very "cheap" even till now.

I have aptly shown that there seems to be a trend where China stocks are valued at a discount to its US and International peers.

https://valuebuddies.com/thread-5110-page-47.html

Thank you for your sharing. It takes true humility to share one's negative results. 

I too have been suffering paper losses on Ali and Tencent. And on HongKong Land and Wilmar. I thought I bought strong businesses with significant margin-of-safety. I thought I bought them like a true value investor, zigging when others are zagging. 

I do feel the frustration everyday, having to suffer the opportunity cost of locked up capital and wishing that I have not committed so early.

But isn't this the path of a value investor? As long as one remains convinced about the quality and prospects of a business, one should invest more (if funds allow) when prices drop.

I do not think that XJP's actions have caused the economic value of Ali and Tencent to collapse as much as the drop in their market caps. I think there is more value now in their stocks.

But I have also come to a thought similar to yours, that I too need a high dividend return while I wait for my stocks to rise to their 'true' value. And 5% is not sufficiently high. 

Everyone will have their own style of value investing. After my experience of owning THG, Wilmar and HKL, my interpretation of 'owning stocks should be practised as owning partial ownership of a business' is that I need a >5% dividend yield, so that even if prices are stagnant or move against me for years, or if the stock market closes down for some years, I will not feel aggrieved.

(05-01-2022, 01:39 PM)weijian Wrote: 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.

Hi Choon, to your comment about being value investors and owning Chinese companies.

I shall quote my fellow moderator's Weijian reply in page 15 of this tencent thread. He has sufficiently explained the idea of value investing in China

(23-12-2023, 03:30 PM)Choon Wrote: Everyone will have their own style of value investing. After my experience of owning THG, Wilmar and HKL, my interpretation of 'owning stocks should be practised as owning partial ownership of a business' is that I need a >5% dividend yield, so that even if prices are stagnant or move against me for years, or if the stock market closes down for some years, I will not feel aggrieved.

Even if a company offers a decent div yield/payout ratio historically, there is no guarantee it will continue to do so. Imho, value investing ideally means buying undervalued business(company) with a controlling stake/outright. For regular OPMI, it does help if the structure is favourable to minorities(e.g. considerable OPMI shareholders who are willing to take up an activist role when the need arises)

Perhaps a suggestion can be to hold a basket of value stocks with > 5% div yield, I wonder if the risk/effort/reward is better than holding the US index ?

(23-12-2023, 10:07 AM)CY09 Wrote: (i) Fear of FOMO if China U turned on its policies, (ii) psychological pain of cutting losses when you know the company is undervalued but what stands in its way is President Xi Jinping

Hope you can overcome your psychological challenges and progress as an investor. 

Regarding opportunity cost. I think if a company is bought at the right price, there isn't really opportunity cost per se, dividend or not. If a company is truly making money that is distributable to the shareholder, then these cash will just accumulate on the balance sheet, which can be distributed any point. If it's growing, then it will continue to grow earnings while share price languish.

So IMHO, dividend is not really a factor. 

Key point is that the dividend is distributable, or could be returned as buybacks. This will be tested, as Baba and Tencent attempts to do exactly just that.

Personally, I prefer the proverbial 1-foot-bar. Baba and Tencent are crowded trades (both long and short) that relies on having a good read on uncertain external factors (politics), that I would rather not have an opinion on.

Adam Khoo is done with Chinese stocks after news of the latest round of gaming crackdown.

Surely a good sign of undervalued country specific market! Haha.

It is getting easier to shoot in the barrel!

I find below from Duan Yongping take on gaming draft rules to be interesting (translated using WeTranslate):
The nature of games is that people need somewhere to spend their time, and online games are the cheapest place to have fun and spend time. Nothing can stop people from playing games, otherwise what you let everyone do? But the quality of the games are many, playing mahjong is one of them. Net net, standardization to prevent certain people eager for quick success and instant benefit & profiteering is pretty good actually. In the long run, this kind of regulation is definitely good for good quality gaming companies.

Direct link in Chinese:
https://xueqiu.com/1247347556/272166720