Spurned Tencent Still Has Legs
This week’s Tech Talk takes us to one of my favorite subjects on China’s internet, as we look at valuations and how accurately they reflect the true worth of the trio of Baidu, Alibaba and Tencent, often called the BAT. That topic was center stage last week, as Tencent received a somewhat rude awakening from one of its oldest and largest shareholders after South Africa’s Naspers not only dumped a sizeable portion of its holdings, but also at a big discount.
This apparent case of parental rejection didn’t faze investors for too long, reflecting many people’s view that Tencent is probably the best positioned of the BAT for growth over the next few years. I largely concur with that view, and have long been a fan of the company’s founder and head geek Pony Ma for his ability to create products the market really needs, often a year or two before anyone else. What’s more, the products his teams create are often quite versatile, again anticipating what people will want before they even want it.
From a valuation perspective, TAB would be a more accurate description for China’s top three internet firms, since Tencent is the largest at the moment with a market value of nearly $520 billion. Alibaba is a close second at about $490 billion, while Baidu is a distant third at just $82 billion.
Tencent’s lofty valuation was briefly called into question late last week when it disclosed that a big chunk of its shares were being sold by longtime investor Naspers. That move saw the South African company, a virtual unknown globally, sell about 2% of Tencent’s shares, lowering its holdings to about 31% of the company from a previous 33%. Investors were spooked by the selling price, which was more than 10% below where Tencent’s shares had been trading the week before the sale was announced.
The stock has bounced back somewhat since then, but is still about 5% below its earlier levels.
Past Its Prime?
So the big question becomes: Is Tencent past its prime, and is now a good time to follow Naspers’ lead and sell? Some potential clues can be found in Facebook, the closest thing to a Tencent equivalent in terms of both size and the kinds of services it provides. Despite the negative news from Naspers that made the biggest headlines, Tencent actually passed another major milestone last week when it officially passed Facebook in terms of market value.
That particular milestone was less due to anything Tencent did, and more a result of the plunge in Facebook’s value as the U.S. giant became embroiled in a major scandal involving misuse of its data by a third-party company. That scandal cast an interesting spotlight on one of Facebook’s Achilles’ heels, namely its global reach that makes it a sitting duck for data miners who want to exploit the platform’s huge volumes of information on average people in most major countries. By comparison, Tencent is mostly confined to China, which is usually cited as a limiting factor. In this case, however, it makes such risk easier to control.
At the same time, I do think that Tencent, whose hugely popular WeChat and QQ social networking platforms are its bread and butter, will suffer from some of the same longer-term issues as Facebook, namely an inability to stay hot forever. It’s clear from what I hear from my U.S. friends and relatives that Facebook has lost its attraction among a younger set of internet users who gravitate toward newer options like Snapchat and Instagram.
I suspect the same will ultimately happen for WeChat and QQ, though perhaps it might take a bit longer due to the way the platforms have wormed their way into people’s everyday lives, myself included. But that was once the case for Facebook, and even earlier it was similar for Myspace, one of the earliest players to discover how quickly social networking services can rise and fall.
In terms of valuation, Tencent currently commands a relatively lofty price-to-earning (PE) multiple of about 48, compared with a poor-man’s 30 for Facebook. Alibaba’s current multiple is roughly the same as Tencent’s, even as Baidu’s lurks more in the neighborhood of Facebook’s.
In the case of Tencent and also Alibaba, investors are focused on the companies’ latest earnings that show their continued ability to post remarkable revenue and profit growth despite their huge size. In its latest quarterly report released last week, Tencent continued to impress markets by reporting its revenue grew about 50% and profit doubled in last year’s fourth quarter, even though the profit is already an immense HK$20.8 billion ($2.7 billion).
What’s more, analysts see Tencent’s profit continuing to grow by about 45% for the next year or two, meaning the current high multiple could be justified over that period. We should note that Naspers, despite its less-than-embracing actions towards Tencent, still owns 31% of its progeny. That stake alone is worth about $160 billion, which is quite a bit more than Naspers’ own market value of about $120 billion. That means investors technically think the value of Naspers’ other main assets is less than zero, hardly a flattering fact.
With such a prodigy offspring, it’s no wonder than Naspers is perhaps feeling just a little inferior and trying to raise some cash by paring down its Tencent holdings. At the end of the day, there’s no question that Tencent is still a prodigy and probably the most outstanding player among the BAT. But I do think the company could be near the top of its game, similar to Facebook, meaning its current high valuation may not be sustainable past the next year or two.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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