Too Much Love for Tencent’s Success

Too Much Love for Tencent’s Success
Updated March 19, 2014 7:11 p.m. ET
Tencent Holdings TCEHY -1.24% is collecting mobile users at a rapid pace. But hype about mobile payments is pushing the stock to heights at which investors should brace themselves.
In the fourth quarter, the Chinese Internet giant saw revenue rise 40% year over year, boosted by its dominant position selling virtual paraphernalia in its mobile-games universe. Net profit rose a less impressive 13% due to marketing costs. But that spending is yielding results. Mobile messaging platform WeChat had 355 million users at the end of 2013. QQ, Tencent’s old desktop messaging product, has a mobile version with 426 million monthly users.

The upshot is that Tencent looks better positioned in mobile than any major Chinese rival. Shares have more than doubled in the past year, and Tencent is now valued at $140 billion. Facebook’s market capitalization is $176 billion.
While the underlying business is enviable, the stock is frothy. Analysts have tripped over one another to stay ahead by raising price targets. Although it isn’t currently a big source of revenue, a key rationale for bullish calls has been the huge potential for payments made with smartphones.
Goldman Sachs GS +0.55% last month raised its target from 450 Hong Kong dollars (about $58) to 700, 23% above today’s price. Goldman projects that Tencent’s mobile payments will account for 12% of all retail sales in China by 2017, or $683 billion, up from almost zero today. Assuming that Tencent takes a 1% cut on transactions, earns a 25% operating margin and few other conditions, then slapping a multiple of 35 on those future earnings, Goldman gets a $45 billion valuation for the mobile-payment business, or HK$190 a share.
Tweaking any of these assumptions even slightly would mean huge swings in valuation. Little wonder, then, that investors sent shares down 7% over two days after the Chinese central bank suspended two types of mobile payments last week due to security concerns.
Tencent is working with regulators on a solution, and the potential for mobile payments is big. But with shares trading at 40 times 2014 earnings, investors should be ready for more sharp corrections.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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