By:
Stephen Lane, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Tencent Holdings Ltd. (OTCMKTS:TCEHY) is an investment company that
engages in the value-added services of online and mobile gaming as well as the
trademark licensing and software development services. They focus on the
self-development of core internet technology and actively peruse progression
and innovation for the industry. They are based out of China and have products
across the world.
• Continued conflict with
Chinese regulators as the Chinese ministry proposes an increase in regulation
causes concern for the future.
• Internal conflict with
Riot Games causes concern for management’s competency.
• Management has
announced a share buyback of 22,700 shares on September 7th shows
confidence in long-term outlook.
• TCEHY nears to new
52-week low on the back of external and internal problems.
Key
points:
China has historically been a difficult place to do
business and regulators have been increasingly strict toward Tencent as of
recent. Chinese regulators blocked a popular Tencent game in August of 2018.
The company had to issue a full refund for all players that had already
purchased the game and this sadly is just the beginning of TCEHY’s regulatory
problems.
The Ministry of Education
of the People’s Republic of China released a report indicating a large increase
in eye problems with the country’s youth. The issue of myopia was labeled as
“very severe” that could lead to lots of challenges for China moving forward.
The cause of this is the extended exposure to screens as well as the lack of
natural light. Regulators are seeking to limit the number of new video games as
well as implementing an age restriction. These external headwinds from Chinese
regulators is concerning for the future of Tencent as a majority of their
sales/business comes from China.
Reports are now coming
out discussing the strained relationship between League of Legends developer
Riot Games and Tencent. Problems began with Tencent’s publishing of League on
China. Riot started taking control and hired a former Tencent executive to
oversee Chinese League. Tensions increased as Tencent started putting pressure
on Riot to create a mobile version of League and Riot refused. Tencent then
published a similar game on mobile called Arena of Valor. Former employees have
described the relationship like a parent and child. Riot being the child who
did not like living with the parent and acting out and Tencent being the parent
who was willing to put up with the bad behavior as long as it got what it
wanted. This internal turmoil with one of Tencents biggest games has been
causing concern for management’s ability to maintain such a large amount of
different games.
While things are looking
bleak for Tencent, but management in early September has announced a share
buyback of 22,700 shares. This could show management’s confidence in the future
of the company. That being said, recent stock trends do not support a positive
response from the market.
What
has the stock done lately?
Recently, Tencent has
been struggling and the stock price has continued to fall. The stock over the
last 3 months has fallen almost 17.5%. This fall can be associated with the
increase in restrictions from Chinese officials and the overall international
tensions with China increasing. Even with the announcing of share buybacks the
company has seen a decline in price.
Past
Year Performance:
TCEHY has seen a decrease of 5.43% over
the last year and is still being looked at as a potential buy. Analysts have it
projected at around $58 stating that the fundamentals behind the company are
still there and that the market is over reacting to the recent developments.
The buybacks should be telling of the company’s expectations of the future.
Source: FactSet
My
Takeaway:
Tencent is dominate in
the tech industry and although they have been facing some strong headwinds they
are likely going to be alright. In the long run they should be able to succeed
because of strong fundamentals. In addition, the AIM International Fund is
underweight in the Asian markets and it is my belief that Tencent will prove to
be a strong long-term stocks that will help diversify our portfolio.
Source:
FactSet
