Does Wall Street “get” Tencent?
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Does Wall Street “get” Tencent?

Chinese internet giant Tencent might be undervalued by the Street – that’s the message sent by Hans Chung of KayBanc Capital Markets last week, when he initiated coverage of the stock. Tencent is one of the “big three” of the Chinese internet scene (the other two being Dominion holdings Alibaba and Baidu).

Tencent has quickly grown to rival western internet companies in valuation and importance (Tencent eclipsed a pre-Cambridge Analytica Facebook to become the world’s most valuable social networking company, and China’s largest company by market cap, earlier this year).

Tencent’s share price has appreciated by almost 80% over the past 12 months

graph 0905 tencent

SOURCE: Yahoo Finance

According to Chung, this impressive market cap is nonetheless far too low for a company with the reach of Tencent. He’s put a price target of $71 for the company on the Hong Kong stock exchange – a premium of around 40%.

Justifying this valuation in an investment note to clients, Chung explained:

“We believe the Street is underestimating Tencent’s social media platforms. Tencent dominates consumer engagement and has a variety of tools for businesses to reach consumers. We believe all of Tencent's mobile platforms combined account for more than 50% of total mobile user spent time in the country. This drives extraordinary consumer engagement and makes Tencent the most powerful clearing house for interactions between consumers and businesses of all sizes."

It’s hard to argue against this logic. In March, we reported on Tencent’s earnings beat in its fourth quarter – a positive that investors overlooked. Instead, they sent its share price down on the day, more concerned at its ambitious plans to reinvest capital. In a competitive, fast-moving industry, however, there’s a very strong argument that this is the right strategy to consolidate and increase Tencent’s coveted position in the market.

Disclosure

Dominion holds Tencent in its Global Trends Ecommerce Fund.


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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.