Saturday, 4 June 2022

Why Tencent as a Company Looks Very Expensive Now

Tencent released its 1Q results and its core business performance does not look good. What has supported its earnings are selling stakes in its past successful investments in other companies

Effects of Asset Sales

Based on 1Q results, we can see excluding the gains from selling part of its holding in Sea Holdings, Tencent's core business only made about RMB 11 billion. Similarly in Q4 of FY 2021, if the effects of its asset sales are excluded, Tencent's core business earns about RMB 10-11 billion. The 2 latest quarterly results reflects the new normal for Tencent post China's government regulations.

What is propping Tencent is its continuous monetization of past investments. Fortunately, it has made numerous good investments such as in Tesla and Sea Group, hence despite these 2 fall in share prices, Tencent's investments in them are still in the green. However, share sales is not a recurring item and eventually Tencent will run out of sales to prop up its net income.

With the tech bubble now deflated, Tencent's ability to report large sales gain is diminished.


Tencent's core business is earning about RMB$44 billion with China's regulations slowing. However, the Chinese government has not vowed to stop regulating its tech companies. Hence it is cautious to presume that Tencent's profits wont grow despite revenue growth in China, mainly due to more regulations eating into its margins.

In this way, it is safe to presume that its core business is worth about 30 times P/E due to resiliency in the media business as a leader and the no 2 in cloud services, though Huawei may overtake it as Huawei is the CCP backed cloud provider and not Alibaba or Tencent who has been alienated by the Chinese government in procuring such services.

This puts Tencent's core business at a value of RMB $1.32 Trillion or HKD $1,560 Trillion. Its stake in major companies such as in Tesla or Sea Group are only about RMB$700 billion post the recent share decline and sales in Sea Group, meaning I will add about HKD$850 billion.

Based on a sum of parts, Tencent is worth about HKD $2.4 Trillion. Tencent's current market value in Hong Kong is HKD $3.45 Trillion. Hence, I expect a 30% decline in Tencent's share price from HKD $359 to about HKD $250.

Tencent currently is an expensive stock. Unless China stops its regulations on Tech companies which are hurting their margins, it is difficult for Tencent's core business to grow and command a good valuation. 

Given how the communist party prioritizes control, it is unfortunate that the good management of Tencent is hampered by their own government. I expect further share decline when Tencent releases its Q2 results which will be another negative profit growth with no share sales.

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