Tencent: The most undervalued giant tech?

The share price has taken a pummeling this year...is it now a bargain?

Article updated: 20 November 2018 12:00pm Author: Michael Baxter

It’s one of the biggest companies in the world, it has been called China’s Berkshire Hathaway, only in one key way it’s different, yes, like Berkshire, there are many strings to its operation, but this is a tech firm. The share price has taken a pummelling this year, but does that mean it is now a bargain?

There is a lot to Tencent

Its most famous part is WeChat — a kind of Chinese Facebook, PayPal, WhatsApp, and Skype with a bit of an Amazon type business thrown in for good measure. There is also a business version of WeChat, which allows, for example, users to keep track of holidays. The rumour mill has ground out talk of an augmented reality platform.

The company is a newbie compared to the US techs — WeChat was released in 2011, at the end of 2015 it had 697 million users; in 2016 it had 889 million users, but by the second quarter of this year it had passed a billion users.

Looking beyond WeChat, it has a search engine, so a bit like Google, a digital payments arm, similar to PayPal, it distributes music, a bit like Spotify, it has a TV service, a bit like Netflix and a movie arm, making it a bit like Disney.

There is another way of putting it; it is a bit of a money machine.

Share price

Yet the share price has suffered terribly this year — its Hong Kong listed shares had risen from less than a Hong Kong dollar in the middle of the last decade to 470 or so at the beginning of this year. Since then, the share price has fallen by roughly 40 per cent.

But this fall has dragged the PE down to around 28 and its market cap is now in the mid $300 billion range — after it passed $500 billion at the end of the year.

The fall in its share price has roughly coincided with the fall in the Facebook share price — at least, in both cases the falls occurred this year. But timing is where the similarity ends. The Facebook share price has fallen over privacy concerns and the nagging doubt that teenagers are ditching the platform — which is being seen as increasingly uncool and more for grannies than kids. By contrast, Tencent’s share price fell after profit growth abated — quite possibly temporarily — largely because video games sales hit a brick wall after a reorganisation of the Chinese regulator earlier this year meant no new games have been approved for some time. It is generally assumed that this is a temporary problem, after-all, the Chinese appetite for video games is massive.

Three ways the company is interesting

There are many reasons why Tencent is worth consideration.

Firstly, as above, the Chinese regulatory block of video games will surely lift, creating a massive level of pent up demand.

Secondly, the company uses advertising sparingly, typically limiting ads to two a day — so there is a lot of potential in this area. Furthermore, with a more relaxed regulatory regime towards privacy in China; the company may not be limited in the way Facebook is likely to be in the future.

Thirdly, Berkshire Hathaway’s Charlie Munger said that Tencent is one of the few companies in the world that could break the stranglehold that VISA, MasterCard and American Express have on the payments business.

Correlated with China

Tencent also provides a pretty good bellwether of China, if you believe in the Chinese economy long-term, then Tencent might be the vehicle for you.

Foundation

Tencent was founded in November 1998 by five Chinese men, the most famous of whom is Ma Huanteng also known as Pony Ma.

But he doesn’t have the same kind of profile as Jack Ma, founder of Alibaba, in the West, but I suspect that is because Alibaba is listed on the NASDAQ.

Spread your wings

For investors, Tencent represents an opportunity to spread their wings.

One way of investing in the company is via a fund. Relevant funds include JPMorgan Emerging Markets Trust, in which Tencent is its top holding, and the following three funds where Tencent is the second biggest holding; Janus Henderson China Opportunities, Fidelity Asia and Baillie Gifford Greater China.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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