Tencent-backed IPOs Aren’t Doing That Great

By October 18, 2018 February 22nd, 2019 The Weekly
Tencent IPOs don't do so great

Tencent Music has been the talk of tech and business media for the past couple of weeks.

Even as the upcoming IPO is delayed at least until November due to “weak markets”, reporters and analysts have been weighing the company against Western competitors like Spotify, debating the merits of the online music market.

There’s another problem, though. Tencent-backed IPOs tend to go… not so well for investors.

The Problem With Tencent-backed IPOs

Crunching the numbers, Insight Provider Arun George has found that it’s often “prudent for financial investors to give a Tencent-backed IPO a wide berth.”

Tencent is certainly prolific as a holding company. In fact, as George points out, it has had more tech exits than any venture capital firm, private equity fund, or corporate investor.

The conglomerate has invested in more than 15 companies that IPO’d since the start of 2017, including China’s Meituan-Dianping, Korea’s Netmarble, and Singapore’s Sea.

Two-thirds of those companies’ shares now trade lower than their IPO price. And the average share price performance gets worse as time goes by.

Anyone else would find these figures alarming. If an investment fund had an equivalent stake in those IPOs in terms of monetary value, it would be out almost US$4 billion today. Obviously, the Chinese company didn’t have to pay full price to buy most of those shares but it’s still sobering.

It’s not like the firm depends on those returns for its daily bread though.

“Tencent’s invested companies can either make a direct contribution to the main business or indirectly strengthen Tencent’s competitive moat by providing exposure to new but non-core sectors,” the analyst writes.

A positive performance post-IPO is basically just a welcome bonus – which might make sense for them but isn’t such good news for investors who buy into the IPO.

Time for Plan B?

Tencent has more things to worry about. Its share price is down 42 percent and the firm lost US$200 billion in market capitalisation this year because of flat game sales and China’s crackdown on new games titles.

Video games and related transactions form the bulk of the company’s revenues – as much as 70 – 80 percent according to research by Insight Provider Henry Soediarko.

Perhaps it’s time for Tencent to shuffle things around. Insight Provider Ming Lu writes that the company used to silo off its operations to encourage competition when none was to be found from the outside. It was this system that led to WeChat beating internal competitor QQ, for example.

Better internal communications and a shift to business-facing operations should improve their fortunes down the line, although they’ll need to weather the storm in the short run, Lu says.

Wait! There is plenty more coverage about Tencent and Tencent Music on Smartkarma. Dig deeper by exploring some of the investment research network’s Insights listed below.

More Insights by Smartkarma

Sign up or log in to Smartkarma to read more about Tencent and Tencent Music.

Tencent Music Entertainment IPO: Live Streaming Industry Dynamics Portend Much Slower Growth Ahead
China’s live streaming industry only has a short window for super-growth. 

Tencent Music Pre-IPO – Valuations Estimates – Leaving on a Jet Plane – $30bn Was Quite Stretched
The IPO is not happening for now, but here are some estimations on valuation.

Tencent (700 HK): A Generalist’s Guide
Ten-who? Get up-to-speed on all things Tencent with this handy guide.

Get a Different Perspective

Asia’s Technology Bear Isn’t Ready to Hibernate
Tencent and its ilk have thrived on the venture capital model pioneered by SoftBank, but the going gets tougher.

The Death of the IPO
The shrinking of public markets is putting the squeeze on smaller investors.

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