Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

<p><strong><a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> shares slid 18% in the two months after reaching the record high on 25 January 2021.</strong> The shares have been under pressure mostly on regulatory risks along with Alibaba.  As Tencent reported solid 4Q20 earnings on 24 March 2021, many of the Chinese Internet stocks took a hit on news that Chinese Internet platforms may be “encouraged” to contribute their digital payment and eCommerce transaction data to a joint venture company overseeing such lucrative data collection. While this news has been slowly reverberating since the beginning of the year, we are likely to have more clarity in the coming months. </p><p>Our preliminary view on the Fintech risk is that Tencent will likely face a smaller impact than <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>  – albeit, Alibaba shares have more than fully reflected such known risk, in our view – because Tenpay has a smaller exposure to consumer loans.  We will cover this discussion at another time. </p><p>While investors certain can blame such share overhang risks undercutting the bullish momentum from the beginning of the year, we flag that Tencent’s results hint that the company’s benefit from the COVID-19 is fading.  Our key observations from the results are:</p><ul>
<li>
<strong>The online game growth of 2Q-3Q20 is not sustainable.</strong>  The growth for 2020 was impressive and the 4Q20 growth was still solid but there are signs that the growth is slowing even with new game introductions.  We estimate online game revenue growth to slow to 25% in 2021. </li>
<li>
<strong>Online advertising revenue growth re-accelerated marginally in 2020.</strong>  Tencent’s social advertising growth is gaining momentum as P4P is picking up with Moments ads.  We estimate advertising revenue growth remains stable at 19% in 2021. </li>
<li>
<strong> Fintech growth is promising, notwithstanding the government risk. </strong> 4Q20 growth remained healthy at 29%.  We believe 19% growth in 2021e is achievable.   </li>
</ul><p><strong>Valuation:</strong> Our SOTP based on 2020 valuation comparables suggests a fair value at over HKD700, but there is a lower upside as we roll over to 2021 valuation comps.  <strong>Even though operating metrics still look solid, Tencent’s risk-return profile looks less compelling despite the 18% fall. </strong>    </p>

Tencent Holdings (700 HK) shares slid 18% in the two months after reaching the record high on 25 January 2021. The shares have been under pressure mostly on regulatory risks along with Alibaba.  As Tencent reported solid 4Q20 earnings on 24 March 2021, many of the Chinese Internet stocks took a hit on news that Chinese Internet platforms may be “encouraged” to contribute their digital payment and eCommerce transaction data to a joint venture company overseeing such lucrative data collection. While this news has been slowly reverberating since the beginning of the year, we are likely to have more clarity in the coming months. Our preliminary view on the Fintech risk is that Tencent will likely face a smaller impact than Alibaba Group (BABA US)  – albeit, Alibaba shares have more than fully reflected such known risk, in our view – because Tenpay has a smaller exposure to consumer loans.  We will cover this discussion at another time. While investors certain can blame such share overhang risks undercutting the bullish momentum from the beginning of the year, we flag that Tencent’s results hint that the company’s benefit from the COVID-19 is fading.  Our key observations from the results are:

The online game growth of 2Q-3Q20 is not sustainable.  The growth for 2020 was impressive and the 4Q20 growth was still solid but there are signs that the growth is slowing even with new game introductions.  We estimate online game revenue growth to slow to 25% in 2021. 

Online advertising revenue growth re-accelerated marginally in 2020.  Tencent’s social advertising growth is gaining momentum as P4P is picking up with Moments ads.  We estimate advertising revenue growth remains stable at 19% in 2021. 

 Fintech growth is promising, notwithstanding the government risk.  4Q20 growth remained healthy at 29%.  We believe 19% growth in 2021e is achievable.   
Valuation: Our SOTP based on 2020 valuation comparables suggests a fair value at over HKD700, but there is a lower upside as we roll over to 2021 valuation comps.  Even though operating metrics still look solid, Tencent’s risk-return profile looks less compelling despite the 18% fall.     

Tencent (700 HK): Taking Foot Off the Pedal

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a> raised around US$3bn in its secondary listing in Hong Kong.</p><p>We have covered most aspects of the deal in our earlier notes, <a href="https://www.smartkarma.com/insights/baidu-secondary-listing-early-look-will-be-one-of-the-largest-secondary-listings-this-year" target="_blank" rel="noopener">Baidu Secondary Listing Early Look - Will Be One of the Largest Secondary Listings This Year</a> and <a href="https://www.smartkarma.com/insights/baidu-secondary-listing-smaller-than-expected-doing-the-bare-minimum" target="_blank" rel="noopener">Baidu Secondary Listing - Smaller than Expected, Doing the Bare Minimum</a>.</p><p>In this note, we'll talk about the trading dynamics.</p>

Baidu (BIDU US) raised around US$3bn in its secondary listing in Hong Kong.We have covered most aspects of the deal in our earlier notes, Baidu Secondary Listing Early Look - Will Be One of the Largest Secondary Listings This Year and Baidu Secondary Listing - Smaller than Expected, Doing the Bare Minimum.In this note, we'll talk about the trading dynamics.

Baidu Secondary Listing Trading - Strong Demand but Weak Price Action

<div><p>Bilibili plans to raise around US$3bn in its secondary listing in Hong Kong. </p></div><div><p>We have covered the background of the deal in our earlier notes, <a href="https://www.smartkarma.com/insights/bilibili-secondary-listing-early-look-will-probably-be-more-like-jd-and-netease" target="_blank" rel="noopener">Bilibili Secondary Listing Early Look - Will Probably Be More like JD and NetEase</a> and <a href="https://www.smartkarma.com/insights/bilibili-secondary-listing-early-look-4q20-results-quick-note" target="_blank" rel="noopener">Bilibili Secondary Listing Early Look - 4Q20 Results Quick Note</a>.</p></div><div><p>In this note, we'll touch upon the updates since our last note.</p></div>

Bilibili plans to raise around US$3bn in its secondary listing in Hong Kong. We have covered the background of the deal in our earlier notes, Bilibili Secondary Listing Early Look - Will Probably Be More like JD and NetEase and Bilibili Secondary Listing Early Look - 4Q20 Results Quick Note.In this note, we'll touch upon the updates since our last note.

Bilibili Secondary Listing - Volatile but Should Be Hot

Event-Driven

<div><p>On 22nd March 2018, after market close in Hong Kong one of the largest overnight placements was launched. On that day, <a href="https://www.smartkarma.com/entities/naspers-ltd" target="_blank" data-smartkarma-citation="entities:21085:1" rel="noopener">Naspers (NPN SJ)</a> reluctantly sold US$10bn worth of <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> shares.  <span>I say reluctantly because Naspers provided a three year lock-up at the time of the deal. That lock-up will expire next week. </span></p></div><div><p>We have covered the previous placement in our earlier note, <a href="https://www.smartkarma.com/insights/tencent-placement-huge-deal-in-size-small-in-relative-terms-succumbing-to-the-holdco-discount" target="_blank" rel="noopener">Tencent Placement - Huge Deal in Size, Small in Relative Terms - Succumbing to the HoldCo Discount</a> and spoken about the implications of the lock-up expiry in our Feb 2021 note <a href="https://www.smartkarma.com/insights/tencent-placement-lock-up-expiry-us-10bn-block-and-buyback-linked-holdco-trade" target="_blank" rel="noopener">Tencent Placement Lock-Up Expiry - US$10bn+ Block and Buyback Linked Holdco Trade</a>.</p></div><div><p>In this note, I’ll talk about the updates since then.</p></div>

On 22nd March 2018, after market close in Hong Kong one of the largest overnight placements was launched. On that day, Naspers (NPN SJ) reluctantly sold US$10bn worth of Tencent Holdings (700 HK) shares.  I say reluctantly because Naspers provided a three year lock-up at the time of the deal. That lock-up will expire next week. We have covered the previous placement in our earlier note, Tencent Placement - Huge Deal in Size, Small in Relative Terms - Succumbing to the HoldCo Discount and spoken about the implications of the lock-up expiry in our Feb 2021 note Tencent Placement Lock-Up Expiry - US$10bn+ Block and Buyback Linked Holdco Trade.In this note, I’ll talk about the updates since then.

Tencent Placement Lock-Up Expiry -  Block and Buyback Linked Holdco Trade Update

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

<ul>
<li>Hellobike, an Alibaba’s investee and traffic source, will go public in 2Q21.</li>
<li>NetEase’s Cloud Music is seeking IPO next year.</li>
<li>The authorities said Tencent and Baidu were fined not because they eliminate competition, but because they forgot to ask for approval.</li>
<li>Tencent invests in Rakuten.</li>
</ul>


Hellobike, an Alibaba’s investee and traffic source, will go public in 2Q21.
NetEase’s Cloud Music is seeking IPO next year.
The authorities said Tencent and Baidu were fined not because they eliminate competition, but because they forgot to ask for approval.
Tencent invests in Rakuten.


China Internet Weekly (Mar 15): BABA & NTES Subsidiaries Seek IPO, Tencent Invests in Rakuten

China

NetEase, Inc. is an Internet technology company that develops applications, services and other Internet technologies in China. The Company's core businesses consist of email service, web portal and online entertainment, including online gaming services. NetEase also offers online advertising, search, mobile applications and e-commerce.

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NetEase Inc (NTES US)

Tencent (700 HK): Taking Foot Off the Pedal

Tencent shares are under pressure due to regulatory uncertainty, but its game growth is also slowing as the benefit of COVID-19 stay-at-home order...

Mitchell Kim

Baidu Secondary Listing Trading - Strong Demand but Weak Price Action

Baidu (BIDU US) raised around US$3bn in its secondary listing in Hong Kong. In this note, we'll talk about the trading dynamics.

Sumeet Singh

Bilibili Secondary Listing - Volatile but Should Be Hot

Bilibili plans to raise around US$3bn in its secondary listing in Hong Kong. We have covered the background of the deal in our earlier notes. In...

Sumeet Singh

Tencent Placement Lock-Up Expiry - Block and Buyback Linked Holdco Trade Update

On 22nd March 2018, in Hong Kong one of the largest overnight placements was launched. On that day, Naspers sold US$10bn worth of Tencent shares....

Sumeet Singh

China Internet Weekly (Mar 15): BABA & NTES Subsidiaries Seek IPO, Tencent Invests in Rakuten

Tencent was fined not because they eliminate competition, but because they forgot to ask for approval. Tencent invests in Rakuten. Hellobike and...

Ming Lu

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