Tencent700307,20 HKD
What do they earn
Tencent is a technology holding company, investing in various IT businesses. The most famous assets of the company:
- Messenger and online portal QQ.
- Weixin and WeChat are social networks, Messenger and payment app. Actually, Weixin is an app for mainland China, and WeChat is for the rest of us.
According to the company's annual report, its revenue is divided as follows.
High value-added services — 52%. Everything, What Does It Have to Do with Online Gaming, gives 31,12% from the revenue of the entire company, And related to social networks — 20,88%.
Revenue in this segment comes mainly from the sale of virtual items, such as in-game items, and for sharing on social networks. Segment gross margin — 52,45% from its proceeds.
Online advertising — 16%. Advertising on social networks and other similar online platforms accounts for most of the segment's revenue. 13,45% from the entire revenue of the company, The rest is accounted for by advertising in the media — 2,55%. Segment gross margin — 45,78% from its proceeds.
Fintech & Business Services — 31%. This, in fact, two different businesses:
- Fintech – Payment Fees, asset Management. The company receives all income as a percentage of the size of transactions.
- Business Services - Cloud Services. Payment is received by subscription.
Segment gross margin — 29,84% from its proceeds.
Other — 1%. It is the production and distribution of films and television programs, content licensing, sales of related products. Segment gross margin — 13,24% from its proceeds.
A very significant part of the company's business is its non-operating income from investments in other enterprises, that it does not directly control.
So, in 2021 55,02% The company's operating profit came from "other income". Here's what those revenues consisted of in 2021:
- The sale of Tencent's stake and the growth in the value of the company's stake in other, unnamed enterprises — 78,98%. Basically, these are different IT projects.
- Tax Deductions — 5,94%.
- Income from the growth in the value of the company's financial assets — 15,08%.
The company's non-operating income is unstable. In 2021, they amounted to 149.567 billion yuan. 55,02% the company's operating profit in 2021, And in 2020, they were 57.131 billion yuan. 31% The company's operating profit in 2020. All in all, then empty, then thick.
The company's revenue by country and region is divided as follows: 91,71% - Mainland China, 8,29% — The Mysterious "Other". Probably, the "other" is Hong Kong, Macau and Taiwan, but I'm not sure about everything 100%, And the report is silent. Mysterious soul of the East!
Arguments in favor of the company
Promising, I guess. When talking about digital companies from Asia, it is common to point out, that there is a "very promising growing market" and "great opportunities for digitalization". And in principle, this kind of talk has a positive effect on the quotes of such companies: Investors are cramming into these stocks, Like herrings in a barrel. All in all, The halo of the company's prospects will not hurt.
But I think, that Tencent's business has good prospects in a world of endless pandemic. China has become famous for quarantines with the total closure of centers of economic activity without regard to the consequences for society and the economy.
I have a hypothesis, that such quarantines will be repeated more or less regularly: The Chinese government has invested a lot in this area. One mass test eats up an insane amount of money — about $254 billion a year, or 1,5% China's GDP. well, unless the PRC invades Taiwan — and then, may be, The coronavirus crisis will miraculously end and all restrictions will be lifted.
So far, we've seen, that in Tencent's main market, the most cannibalistic quarantine restrictions are turned on when necessary, and for the company's digital-oriented businesses, this could be an opportunity for development.
More than half of its revenue comes from the sale of virtual items for real money — this is the replacement of activity in real life with activities that are safe for the authorities, That, presumably, gives the consumer a surrogate for satisfaction of ambitions, As long as he is deprived of subjectivity in the real world.
Also, the transfer of a significant part of the activity online will be a boon for the company's purely applied business — the cloud, advertising and fintech, simply because of the increase in the number of customer transactions in this area.
Metastocks. Over 50% The company's revenue is tied to the conversion of real money into virtual items. In light of the popularity of the idea of the metaverse and the almost complete absence of issuers in the global markets, working in this area, Tencent surprisingly looks like one of the few issuers, which really works in the field of the metaverse — turns money into virtual items. This leads to several practical conclusions for the company.
Firstly, Stocks may soar on the wave of investor interest in the topic of the metaverse. Especially if they are picked up by some well-known and popular investor like Elon Musk or Cathie Wood, then ordinary workers can cram into Tencent shares.
Secondly, The very experience of working with the metaverse and extracting real money and profits from it can mean, that Tencent might be working on some kind of breakthrough project in this area.
If the project is really promising or the company has a major partner, Again, this could attract a lot of investors to Tencent's shares. And then, that Tencent may have such an investor partner, more than likely. The same Pavel Durov was given a lot of money by various billionaires for the development of Telegram, And I can't see it yet, for them to get them back, but also to make them very angry about it, also not visible.
I am skeptical about the real business prospects of such projects, but it does not mean, that the company's stock won't be able to swell like an overflowing kidney. All in all, Keeping in mind relevant experiences, The company would keep in mind the possibility of such a scenario.
Separation without authority. Tencent structure, basically, allows individual subdivisions to be listed on the stock exchange as separate issuers – and, probably, their shares will grow faster than the united Tencent.
There are prerequisites for this: The growth of the company's financial indicators has slowed down and the quotes are marking time. Tencent's shares are now worth as much as 2 years ago and do not reflect the growth of its revenue and profit during this time. Quite possible, that an activist investor will appear among the shareholders of the company, who will start a scandal and demand its separation.
Dividends. The company's profit for the past 12 months is HK$25 per share. A hypothetical activist investor might ask for generous dividends — for example,, 18 HK$ per share per year, what will give 5,6% per annum.
The company rarely pays dividends, but irregularly. This year, for example, doesn't pay at all — and it's usually not too significant amounts at the level of 0,49% per annum. And if an activist investor emerges, then he can ask the company for dividends.
Price. Tencent is inexpensive. She has P / S 4,69 and P / E 13,1. It's not much in general.. In America, such a company would cost 2-3 times as much.
Now in the PRC in real estate money is invested in 5 times more, than in stock market, And the real estate market itself is now on the verge of a crisis.
If it happens and this bubble bursts, one can cautiously hope that, that some of the money from real estate will go to the stock market — and Tencent is losing a lot, as a low cost technology company.
Investing in different types of assets in different countries, trillion dollars
| China | USA | Japan | United Kingdom | Australia | |
|---|---|---|---|---|---|
| Residential Properties | 62 * | 34 | 10 | 10 | 6 |
| Fixed Income | 19 | 48 | 14 | 7 | 2 |
| Promotions | 13 | 47 | 7 | 4 | 2 |
What can get in the way
It's no longer bargaining. IN 2 quarter of 2022, compared to the same period in 2021, the company's revenue increased by 0%, And costs have gone up a lot: Gross profit fell by 9%, Operating Room - On 34%, and the final one is on 52%.
Revenue stagnated mainly due to lower advertiser activity and payment volume, On the other hand, sales of virtual items and cloud services have grown. But in any case, high personnel and R&D costs ate up all the profits.
The main problem was the modest increase in the audience of the company's applications.. Weixin and WeChat have only increased by 3,8%. This indicates that, that the unbridled growth of the company's business has already stopped. What is wrong, because now Tencent, probably, will actively invest in all sorts of risky startups, And this will reduce the likelihood of introducing significant dividends.
Operating indicators, million users
| 3m2022 | 3м2021 | 2021 | Quarter to Quarter | Year-on-year | |
|---|---|---|---|---|---|
| Average monthly number of Weixin and WeChat users | 1288,3 | 1241,6 | 1268,2 | 1,6% | 3,8% |
| Average monthly number of QQ users on mobile devices | 563,8 | 606,4 | 552,1 | 2,1% | −0,7% |
| Value-Added Services Subscriptions | 239,1 | 225,7 | 236,3 | 1,2% | 5,9% |
On, Invest in this! A company is VIE, i.e. an offshore dummy, who owns nothing. In practical terms, this means the following:
- Tencent Could Zero All Its Shares and Wave Its Hand to Investors.
- Chinese government may outlaw Tencent's VIE shares or all VIE shares. Because VIE shares are in the gray area of Chinese legislation and do not fully comply with it.
Quarantine. That, that the coronavirus crisis in China will last forever, "That's just my hypothesis for now. Maybe, The PRC will decide to seize Taiwan and in the light of a major war, restrictions will be lifted.
In this case, Tencent's business will not grow so actively. Well, even in the conditions of eternal quarantine, Tencent's businesses can hit the ceiling of development.
An intimate question. Over the past year and a half, the Chinese government has shown increased interest in regulating the technology sector. In this regard, Tencent faces certain risks.
The government may prohibit the company from implementing part of its projects. For example, this was the case with Alibaba, which was banned from IPO Ant.
The government may ban an entire industry, in which Tencent has business, — or at least significantly limit it. Last year, the country adopted laws, restricting private services in the field of education, what killed the business of a number of issuers like TAL Education.
They won't pump you up. Thesis, that the company's shares will be pumped up by investors, may be overly optimistic. The Hong Kong stock exchange may well turn out to be a dreary swamp. In the first half of July, it hosted the IPO of Tianqi Lithium, the largest in Hong Kong this year. They wanted to sell $1.7 billion worth of shares, And the occasion was great: Tianqi is one of the largest manufacturers of electric car materials in the world. By idea, The stocks were supposed to fly into the stratosphere.
But on the first day of trading, they fell by 10%, and now, two weeks after the start of trading, shares are worth the same, how much and at the beginning of the IPO, — 82 HK$.
All in all, it might turn out, that the Hong Kong Stock Exchange is just as much a blessing hole, as well as the MICEX, just a little bigger. And there are no guarantees, that the Chinese will soon start shifting their money from real estate to the stock market en masse.
The situation could be saved by a run of Western investors into the Hong Kong market, but, it seems to me, For political reasons, there will be no such raid. Probably, The Chinese market will be ostracized by Western investors. In this case, there is a risk that, that Tencent's shares will continue to dangle in the ice hole.
Conditionally free to make decisions. On that, that a hypothetical activist investor campaign will succeed, I wouldn't hope: The People's Republic of China is a totalitarian country with a so-so level of legality and independence of the courts, so this activist is lucky, if he is not taken to the forest.
Resume
In the Russian Federation, stocks from developed countries may be banned from day to day, therefore, for lack of a better one, you can try to make money on stocks like Tencent. But in this case, it is necessary to take into account the VIE risks.
