Tencent Holdings Ltd (0700)

[Choon]

I remember when Charlie Munger divested his Ali stake, the reason he stated was Ali is just another retailer and will face much competition pressure. It was for a economic/business reason that he divested Ali, not a political reason.

What do u think may be the reason Warren Buffet divested its TSMC stake and not investing in China co since many r so cheap now?

Thanks Bibi. I googled. WB is likely worried about war / geopolitical tension on Taiwan.

But that's still a different point from saying that the Chinese government is opposed to a capitalism way of life / capitalism flourishing / allowing businesses to thrive.

[ksir]

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

Ksir, 

大道无形我有型 is the account of Duan Yongping?

Yup, that is right.
His comments are usually direct, blunt & almost always looking further than others.

The regulations (if ever being implemented as is), will likely kill off the existing small & medium gaming companies (the agency heads going to roll before that ever happen).
Releasing such rules during such depressed time and on friday (why not hold a few more hours and waited for the market to close, for market to digest over the weekend??), it is either "someone" trying to profit from the market panic or just the pure show of stupidity. I bet could be a combination of both.

But anyway, the saga did throw me opportunities to pick up more tencent below 300 and netease at 110. For that, kudos man!

Imho, the rules need to kill off half of the gaming companies before it brings down NetEase and almost all gaming companies before Tencent!

Thank you. I find his comments frank and sharp too. Will keep an eye on his postings.

In your investment thesis for Tencent, 

- how much of it is based on a 'value-play'  / that the price now is not commensurate to its current strength and quality; and

- how much of it is based on a 'growth-story' / that earnings could be substantially higher 5, 10, 15 years from now?

I ask because I struggle to see what future growth there can be given its dominance.

To start with, I am not a visionary and I don't have insider insights of Tencent, NetEase or other China Tech companies.
I am just a regular & happy user of their products/games.
Other than games, I constantly use weChat (mini programs, channels etc), weRead & Huya.

My main reasoning for investing in Tencent is so simple that it borders at dumb
I believe Weixin is a fertile land, it's a virtuous ecosystem for its habitants and products/services offered to satisfy their needs.

As long as it remains so, the growth should come from deepening & widening the products/services and NOT from expanding its habitants (being almost all china users already onboard and restriction of international users).

Gaming is just a huge product segment NOW and probably in near future, but as much as I love playing games (now indulging myself in pokemon unite), it's not my main reason to own Tencent.

[weijian]

(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

hi CY09,

While we have learnt about behavorial biases and able to readily identify it in others, but it is indeed hard for ourselves to "ownself police ownself".

If you have a multi bagger becoming >50% of your portfolio - that is a good problem to have, but still a problem nonetheless. But frequently, those who try to "buy when it is cheap" has a higher tendency to average down on failing knives. When one averages down to have a stock >50% of your portfolio, it is a bad problem to have.

This is where "ownself police ownself" has to come in. IMHO, hard rules related to portfolio/risk management have to come in, so as to override all the decisions/judgement we have (and probably clouded by biases). Just to share some of my rules:

(1) No company can be >20% at all times. Works for averaging down and multi baggers.
(2) The bigger my positions, the higher chance my decisions can be clouded by emotions rather than judgement. My position sizing has to grow with my temperament.

Does it mean that it will always be bad when one averages down to get to >50% of portfolio? Obviously not! I have made some real money with that once, but I recognize I was probably lucky, and it was not a right decision even though I made some good money.

Matter of fact, many of us have won the ovarian lottery. We can risk it all to gain more (when right) but the downside is you lose most of it (when wrong). Those rules stop me from getting rich fast, but surely prevent me from getting poor fast(er). I don't need to be rich(er) but definitely I don't want to be poor - So the rational choice is to choose to get rich slowly. Of course, this is a personal choice as one can choose to live or die by the sword.

[specuvestor]

Just to add to Weijian that making money and making risk-adjusted money is not the same thing. Media celebrates the former which is what we call survivorship bias but I observed the latter is more consistent

That’s why Buffett also sold airlines at the low as he didn’t want to be asked to bail them out as major shareholder nor involved in TSMC when the politics are unpredictable. He looks at simple risk adjusted investments rather than sexy ones

That said Tencent and Baba has political risk overhang but the former has been much compliant

[CY09]

What I have observed across the various social media platforms pertaining to China stocks are 2 camps: those who have completely given up on China and those who are doubling down on the basis on buy when it is cheap.

The latter group is no doubt correct when basing on fundamentals. China Tech are at below 15 times P/E, 10 times or below in free cash flow, they are indeed bargains of the decade where if their fumdamentals are to match international peers, the market cap are set to triple.

However, Tencent, Alibaba, JD, Netease, TME, Ping An Insurance, Huya and the list goes on are facing a higher degree of political overhang. As long as this political overhang remains, there will also be a discount in its fundamentals. If these companies want to close this discount, they have to prove that their "Cash pile" and "cashflow generated" is distrbutable, unfortunately both Tencent and Alibaba are not doing well in this department. They distribute only a small fraction of their free cash while hoarding a larger and larger cash pile.

With both China politics and China Economy not doing them any favour, as OPMI, we have to depend on the mgmt's grace to help us realise value. However, it is apparent both Tencent and Alibaba do not seem to put shareholders very high in its priority. The current reality of their share prices are a reflection of this

[ksir]

What I have observed across the various social media platforms pertaining to China stocks are 2 camps: those who have completely given up on China and those who are doubling down on the basis on buy when it is cheap.

The latter group is no doubt correct when basing on fundamentals. China Tech are at below 15 times P/E, 10 times or below in free cash flow, they are indeed bargains of the decade where if their fumdamentals are to match international peers, the market cap are set to triple.

However, Tencent, Alibaba, JD, Netease, TME, Ping An Insurance, Huya and the list goes on are facing a higher degree of political overhang. As long as this political overhang remains, there will also be a discount in its fundamentals. If these companies want to close this discount, they have to prove that their "Cash pile" and "cashflow generated" is distrbutable, unfortunately both Tencent and Alibaba are not doing well in this department. They distribute only a small fraction of their free cash while hoarding a larger and larger cash pile.

With both China politics and China Economy not doing them any favour, as OPMI, we have to depend on the mgmt's grace to help us realise value. However, it is apparent both Tencent and Alibaba do not seem to put shareholders very high in its priority. The current reality of their share prices are a reflection of this

I wonder if we're talking about the same Tencent.
These 2 years they distributed far more dividend than my expectation, Meituan & JD? 
The investor could just sell them in the market, which I did.

If the CEO main job is a capital allocator and looking at available options to deploy capital, for Tencent (also Baba & NetEase), isn't the most optimal option (highest return) is Share buyback?? 
Why dividend? As an OPMI, they give me dividend, I kana tax then I need to pick my best option to deploy cash, which to me is to buy Tencent/Baba/NetEase again? 
So I then pay trading commission to buy them. 
Actually the above can be achived via their share buyback???

If we look at the amount of share buyback they've done in the recent years during the depressed market, I wonder if that's not prioritizing shareholders return?

[CY09]

In terms of EBITDA earn, the company has about HKD$200-210 Billion generated per year. Taxes amount to about HKD$25 bil. So its true cash generation ability is in the region of HKD$175-$185 billion.

SBB thus far across 4 quarters = HKD$71 billion, Dividends= HKD$22.6 billion.

That is a lot of free cash left behind. Tencent is a conglomerate that has been generating large amount of cash.

It is a conglomerate that is in the midst of spinning off assets in order to become smaller and less in the crosshair of regulators. Hence acquistions have slowed. The accumulation of HKD$15 billion more in cash each quarter; feel could be better deployed to be distributed in the form of dividends and SBB. This means the possibility of either increasing its SBB rate or dividends by 50%. Entirely possible based on the Tencent Conglomerate cash generation ability.

Same too for Alibaba which is using only about 50% of its free cash as distribution back to shareholders in the form of SBB + Dividends. Unless there is a need to keep cash aside to make more donations to the provincial governments

<As an Alibaba Investor, I have been frequently writing to IR to distribute back more of the free cash generated to shareholders in form of SBB/Dividends, however, it does seem the Chinese are very prudent or frugal in cash management which results in a growing cash hoard>

Weighing between the prospect of Dividends and SBB. For China companies, I feel dividends are a better than SBB. This is due to its political climate. Existing investors get the money and decide for themselves if they wish to buy more shares for income or deploy it for other uses. Secondly, with the knowledge of an annual dividend, investors are assured they will not lose 100% of their capital should the communist govenrment turns evil and strangle these giants. SBB means 100% is still lost

Hence dividends for China companies may be a stronger impetus to improve investor perceptions

[ksir]

In this case, we're just playing a different game.
CMIIW, your investment logic seems to be:
* Give more dividend to improve investor perception (to appeal for dividend investors or Mr Market? for short term investor to sell out high?)
* More dividend (return us, our money now!), otherwise I worry, because you are china company, big risk!
* Give out 100% of FCF, either in Dividend or SBB (return us, our money now!), no need to invest for the future.

If that is the case, why not just buy SG companies paying out good dividend.
They are "safe" and some of them also quite cheap with high dividend yield.
Why struggle in China companies?

Below from Bard, not sure if it's accurate:
* Google: Surprisingly, Google doesn't currently pay any dividends to its shareholders. They reinvest most of their profits back into the company to drive future growth and expansion.
* Microsoft: Microsoft follows a consistent dividend policy, distributing around 27% of its profits to shareholders each year. This balances reinvestment for growth with rewarding investors.
* Apple: Apple is known for its generous dividend payouts, currently distributing over 56% of its profits to shareholders. This makes it a popular choice for income-focused investors.
* Meta Platforms: Meta Platforms (formerly Facebook) also has a dividend payout policy, but it's less aggressive than Apple's. They currently distribute around 19% of their profits to shareholders.

I guess they are ok to invest in future because they are US companies and hence safer?
I'm not saying China companies have no risk, in fact I reckon most of them are super high risks and not investible.
But investing in Tencent/Baba/NetEase and other high tech companies are mostly investing for the future (show me the money LATER).

For BABA, as I mentioned in its thread, they have put out a clear priority of their cash usage.
For investors not agreeing with that priority I think the simple way is out? There is opportunity cost by "trapping" your capital in companies you don't agree with just because the price is now alot lesser than your cost?
I agree with Weijian that it's futile in asking company to change their priority, we can't change (or even influence) the company unless we are big enough.

[Choon]

In terms of EBITDA earn, the company has about HKD$200-210 Billion generated per year. Taxes amount to about HKD$25 bil. So its true cash generation ability is in the region of HKD$175-$185 billion.

SBB thus far across 4 quarters = HKD$71 billion, Dividends= HKD$22.6 billion.

That is a lot of free cash left behind. Tencent is a conglomerate that has been generating large amount of cash.

It is a conglomerate that is in the midst of spinning off assets in order to become smaller and less in the crosshair of regulators. Hence acquistions have slowed. The accumulation of HKD$15 billion more  in cash each quarter; feel could be better deployed to be distributed in the form of dividends and SBB. This means the possibility of either increasing its SBB rate or dividends by 50%. Entirely possible based on the Tencent Conglomerate cash generation ability.

Same too for Alibaba which is using only about 50% of its free cash as distribution back to shareholders in the form of SBB + Dividends. Unless there is a need to keep cash aside to make more donations to the provincial governments

<As an Alibaba Investor, I have been frequently writing to IR to distribute back more of the free cash generated to shareholders in form of SBB/Dividends, however, it does seem the Chinese are very prudent or frugal in cash management which results in a growing cash hoard>

Weighing between the prospect of Dividends and SBB. For China companies, I feel dividends are a better than SBB. This is due to its political climate.  Existing investors get the money and decide for themselves if they wish to buy more shares for income or deploy it for other uses. Secondly, with the knowledge of an annual dividend, investors are assured they will not lose 100% of their capital should the communist govenrment turns evil and strangle these giants. SBB means 100% is still lost

Hence dividends for China companies may be a stronger impetus to improve investor perceptions

<As an Alibaba Investor, I have been frequently writing to IR to distribute back more of the free cash generated to shareholders in form of SBB/Dividends, however, it does seem the Chinese are very prudent or frugal in cash management which results in a growing cash hoard>

Do they reply you?

[CY09]

<As an Alibaba Investor, I have been frequently writing to IR to distribute back more of the free cash generated to shareholders in form of SBB/Dividends, however, it does seem the Chinese are very prudent or frugal in cash management which results in a growing cash hoard>

Do they reply you?

========================
No, they did not. Written before to Tencent Music, Sea Group, Yanlord did not yield a reply as well.

However, writting to PRIME US REIT, MUST, Keppel Pacific, Keppel REIT, Suntec REIT, Yangzijiang Finance, I did receive replies from their IR