Tencent Holdings Ltd (0700)

[CY09]

https://techxplore.com/news/2022-06-chin...kdown.html

In a not so recent development, it shows while China has started approving games, those created by the two giants were excluded. This to an extent does show that China is curbing monopolistic gains by its giant private tech companies and is trying to favour the smaller ones.

Tencent' Valuation of Core Business is too High

While i understand Choon's comments that tencent P/E would be 17 times assuming 2021 PATMI's of RMB 224 billion, do note this includes a large amount of a fair valuation gain from sales of assets (149 billion of it). Assuming after tax, this is worth 120 billion. This means the core earnings of Tencent business was RMB $100 billion for FY2021. I doubt Tencent would be able to replicate its fair value gains given the cycle of monetary tightening which is reducing the valuation of tech companies

Secondly, a comparison of 1Q FY 2022 vs 1QFY 2021 (netting off other income) shows its core earnings profitability has halved. This may mean that for FY2022, Tencent business is only garnering RMB $50-60 billion. It would point to a 36 times P/E company which is mightily expensive.

While tencent is able to gain revenue due to a growing Chinese consumer market, its margin is falling due to China's decision to curb monopoly positions and favour smaller companies. This points to not much growth from core business, hence 36 times P/E is not warranted. Alibaba is being sold at a forward P/E of 29. This is where I think Tencent should be a P/E of 30 times. Therefore i believe Tencent's share price are bound to fall further

[Choon]

https://techxplore.com/news/2022-06-chin...kdown.html

In a not so recent development, it shows while China has started approving games, those created by the two giants were excluded. This to an extent does show that China is curbing monopolistic gains by its giant private tech companies and is trying to favour the smaller ones.

Tencent' Valuation of Core Business is too High

While i understand Choon's comments that tencent P/E would be 17 times assuming 2021 PATMI's of RMB 224 billion, do note this includes a large amount of a fair valuation gain from sales of assets (149 billion of it). Assuming after tax, this is worth 120 billion. This means the core earnings of Tencent business was RMB $100 billion for FY2021. I doubt Tencent would be able to replicate its fair value gains given the cycle of monetary tightening which is reducing the valuation of tech companies

Secondly, a comparison of 1Q FY 2022 vs 1QFY 2021 (netting off other income) shows its core earnings profitability has halved. This may mean that for FY2022, Tencent business is only garnering RMB $50-60 billion. It would point to a 36 times P/E company which is mightily expensive.

While tencent is able to gain revenue due to a growing Chinese consumer market, its margin is falling due to China's decision to curb monopoly positions and favour smaller companies. This points to not much growth from core business, hence 36 times P/E is not warranted. Alibaba is being sold at a forward P/E of 29. This is where I think Tencent should be a P/E of 30 times. Therefore i believe Tencent's share price are bound to fall further

"While i understand Choon's comments that tencent P/E would be 17 times assuming 2021 PATMI's of RMB 224 billion, do note this includes a large amount of a fair valuation gain from sales of assets (149 billion of it)."

To clarify, the 17x PE was based on core FY2021 PATMI of RMB124. 

The crux is I had:
1) First, minus off investees (based on book value) from mkt cap to derive Adjusted Mkt Cap;
2) Follow by dividing Adjusted Mkt Cap by core FY2021 PATMI of RMB124 to get 17x PE.


 

[CY09]

Understood what you meant. However PATMI number was inflated during the tech boom cycle because Tencent was selling off its investments at profits.

With the boom downcycle now, Tencent is finding it difficult to realize large profits anymore. Hence PATMI is going to decrease drastically about 50-60% This will push the 17x P/E in point 2 to quite a high ratio in the high 30s range

[CY09]

https://static.www.tencent.com/uploads/2...070079.pdf

As per the latest results, PATMI has fallen off the cliff with a 55% decline. This is due to Tencent not being able to dispose off its investments at a good price. Its core earning margins are decreasing as well (see slide 11), likely due to China's regulatory pressures.

Relying solely on its core business, Tencent is expensive in valuation

[Wildreamz]

Tencent and NetEase absent from 67 new video game approvals in China, as ByteDance and Bilibili emerge as big winners
https://www.scmp.com/tech/policy/article...-bytedance

* China’s two largest gaming companies have not been granted licences for new video game titles in a year, even as approvals resume one-month cadence

* TikTok owner ByteDance, which has been retreating in gaming in recent months, and video streaming platform Bilibili received approval for new titles

---

Possibly related to this.

My theory that there is such thing as "too big to succeed" in Xi's China, sounds more plausible by the day, isn't it?

(ex-investor)

[Choon]

I think a key point is whether one believes this period of weak financial performance by Tencent is a transient one or a structural one.

If one believes it's a transient one (e.g. caused by China's tough COVID measures which hurt the entire economy), then a drop in share price (spooked by 56% decline in headline PATMI) would provide an entry opportunity. Note that on a non-IFRS basis (excluding the one-off effect of disposal/revaluation), operating profit and net profit dropped by less than 20%.

Tencent's peak earnings (non-IFRS) was RMB124B in 2021. I believe given the strength of the WeChat ecosystem of businesses, Tencent has a good chance of surpassing this level 5-10 years from now as China's economy expands.

[Wildreamz]

Hi Choon,

Structural. I have mentioned many times. The decline in business is by design, as government policies favors smaller players (gaming license not released to Tencent, but to their competitors etc.) when any one company gets too big, and threatens central government control.

Else, I am open to suggestions, as to why the preferential treatment?

[ksir]

Have nothing to add on macro view, don't think anyone is so smart to get what Gov intend to do bla bla bla..

Will add my views from months of following and watching Honor of Kings Pro League (https://zh.m.wikipedia.org/wiki/%E7%8E%8...3%E8%B5%9B) in Wechat and Douyu.
It has been a very enjoyable experience, even better than my fav epl soccer matches or NBA matches.
The tactics, skills, pace, characters, stories, commentaries are simply fun to watch.
I guess it is one of the reason why HOK has been top grossing for so long. From Tencent & NetEase Q2 result, their gaming unit have been outstanding.
When the total revenue for gaming market down by over 10%, Tencent's down by abit and NetEase's still growing.
So much of the headlines and speculation of gov crackdown on them, so what if their new games not being approved now? They will not die, but smaller gaming companies could be dying. 
NetEase Naraka blade is another interesting to watch as well, artistic and such details in posture and fighting, but less exciting in term of game play.
Diablo immortal seems to be doing well although from my few hours of trying, not quite as fun as my nostalgic memories of old diablo haha guess such is being human, old good times heh!!

Anyway, I reckon Tencent & NetEase are cheap now and I will let my best friend Mr Times reveal whether I am right or wrong! We shall see. This china bear shall pass sooner or later.

[Wildreamz]

Have nothing to add on macro view, don't think anyone is so smart to get what Gov intend to do bla bla bla..
..

When the total revenue for gaming market down by over 10%, Tencent's down by abit and NetEase's still growing.

So much of the headlines and speculation of gov crackdown on them, so what if their new games not being approved now? They will not die, but smaller gaming companies could be dying. 

..
Anyway, I reckon Tencent & NetEase are cheap now and I will let my best friend Mr Times reveal whether I am right or wrong! We shall see. This china bear shall pass sooner or later.

I would like to focus in on these few points.

If one follow the news flow in the Alibaba thread and the Tencent thread, one would notice that it is no longer isolated incidents, but a pattern of events and actions by the CCP, since at least 2018 to strengthen internal control (this was released in late 2018: https://en.wikipedia.org/wiki/Xuexi_Qiangguo).

Not just the preferential treatment towards smaller game developers (read the previous link posted, new game license were issued to smaller game developers, only big game developers like Tencent and NetEase did not receive new gaming license, after 1 full year. 

This is another example: Alibaba and Tencent’s darkening clouds https://www.ft.com/content/7726df1b-886b...e175f504ca

An official in Alibaba’s home province of Zhejiang said the company had done well in winning government contracts before 2020, when founder Ma crossed a political red line with a speech in Shanghai criticising regulation.

“That era has gone as Alibaba fell out of favour with President Xi [Jinping],” said the official. “These days we are leaning towards state-backed cloud services like Tianyi as they are considered more politically reliable. That will be the trend in the coming years.”

Every core business of Tencent and Alibaba including: gaming, cloud, digital payments (digital yuan), fintech (https://www.tekedia.com/the-precious-ant...ecticides/) etc. faced direct government action that limited their competitiveness.

In principle, I would agree that investors should ignore the noise of politics and macro. But in extreme cases (when investing in businesses operating in authoritarian regimes with increasingly unpredictable/hostile regulations etc.), investors may need to start considering the worst case scenario, and not sweep every red flag under the rug. 

Just my 2c. Not investment advise. And you are right, only time will tell.

Edit: I'm not bearish China as a whole, but specific to large companies, which poses direct threat to central government control, the larger and more powerful they get.

(ex-investor in both Alibaba and Tencent)

[CY09]

As an observer in China's e commerce space, there are indeed observations that corroborate. PDD/JD/Kuaishou are growing their GMV while Alibaba is stagnating. It has nothing to do with Alibaba being sluggish.

In the cloud computing space, Huawei is gaining share over Tencent and Alibaba despite Huawei's suite of services being unable to match up to the other 2 and this is largely due to government contractors moving to Huawei. Alibaba is superior where its own propriety chips produce outstanding performances. In Singapore's example, it will be like a sudden shift where all government agencies and contracts use NCS Singtel services instead of AWS/Alibaba/IBM/Google/Microsoft Azure

Tencent is more unfortunate where a few industries it is in- live streaming and game steaming have been whack hard by Chinese regulations resulting in its subsidiaries turning from profitable to making losses