After three straight years of declines, Chinese tech company Tencent is on track to post profits in 2024. The stock is up more than 3% so far this year, while Hong Kong’s main Hang Seng index is down more than 4%. Tencent, known primarily for its gaming and social media businesses, is the index’s largest stock, with a market capitalization of more than $350 billion. Morgan Stanley equity analyst Gary Yu and his team said in a report on April 14 that the first quarter should be a “trough” for Tencent’s gaming business. “We expect gaming growth to decline 4% year-over-year (vs. a 3% decline in the same period) mainly due to weaker domestic growth, but our previous expectations for the second quarter remain unchanged.” Tencent raised its holdings on the stock to a target price of HKD 400 (USD 51). The stock is up 30% from Friday’s closing price. Chinese authorities resumed approval of Tencent Games in late 2022 after being frozen for more than a year. When asked about the risks of new restrictions in late March, management said regulators have made it clear that they want to “provide a healthy environment for growth rather than constrain the industry”. That’s according to the FactSet transcript of the earnings call. Most of Tencent’s gains this year came after its quarterly earnings report. The company’s other main sources of revenue include advertising, financial technology and business services. “In our (Asia ex-Japan Internet) equity coverage, Tencent is our top pick, given Tencent’s diversified business model and profit expansion story.” Morgan Stanley’s Yu noted that Tencent has announced it will buy back at least $13 billion in 2024, more than doubling last year’s buyback plan, with a yield of about 5%. The buyback halted the sale of Prosys shares in Chinese companies to fund its own share buyback program. Prosus is a Netherlands-based company owned by Naspers, a primary investor in Tencent. Charlene Lau, head of internet and gaming research for Asia Pacific at HSBC, said in a report: “Based on Process’s current share issuance pace in the first quarter of 2024, Tencent’s total repurchases in 2024 will be approximately 2 times Process’s share issuance. On April 16, the report stated that “Since mid-January, Tencent has increased its daily repurchase volume from HK$500 million/day to HK$1 billion/day.” HSBC has given Tencent a buy rating and a target price of HK$385. The investment firm expects Tencent’s gaming business to turn a profit soon, though not until the second half of this year. “While the inability to do buybacks during the lock-up period (a month before earnings) could weigh on share prices in the near term, continued recovery in gaming and resilient growth in advertising, fintech and business services should help sustain earnings growth. Through improvement profit margin,” the HSBC report said. Tencent will release its first quarter results on May 14. Chinese internet companies Alibaba and JD.com have also announced stock buyback plans this year. “I believe we will definitely see a more mature performance or behavior pattern, if you, especially listed companies do buybacks, pay dividends,” Pan Grant, head of Chinese asset management company Noah Holdings, told me in an interview on Friday. . “The stock market was essentially valuation-driven,” he said. “But now I think people are actually looking not just for valuation, but for the true value of the company. They’re not looking for price-to-earnings ratios, they also factor in Hong Kong’s lower liquidity.” He expects the arrival of a new CEO to improve the situation even as the stock price rises in the market. HKX co-chief operating officer Bonnie Chan will take over as head of the business at the end of May. Noah’s clients have also started asking for more information on Chinese investments in the past two to three quarters, Pan said, adding that prices have reached a level where buying opportunities may be possible. —CNBC’s Michael Bloom contributed to this report.
