Bank: Torrid time for China internet sell-offs

China, despite plenty of challenges, has traditionally been a robust performer for internet and related activity. But October 24th saw a “severe sell-off” according to analysts at investment bank Exane/BNPP. In trading on October 25th there was something of a recovery following the earlier dramatic declines.

But the hard numbers on the falls did not make happy reading: Tencent ADR -14 per cent, BABA -13 per cent, Pinduoduo/PDD -25 per cent, KWEB -14 per cent), “as markets digested news-flow associated with the Chinese 20th National Congress Party Congress,” said the bank’s report. The falls infected European stocks. For example, Prosus, the new-ish spin-off from Naspers lost 15 per cent of its value.

The Tencent fall cost South Africa’s Naspers (a major investor in Tencent) a massive 130 billion Rand (17.4 per cent, about €7.2 billion).

Not helping was trading in China’s Yaun currency which fell to its lowest against the dollar since 2007.

The bank said: “We see a number of macro and geopolitical [moves] at play in the Congress including:
1/ the make-up of the new Standing committee (interpreted as a shift away from market friendly economic reform agenda – although new Premier Li Qiang has been highlighted as potentially business friendly by some elements of the media)
2/ the continued commitment to zero COVID (there had been some hopes of easing)
3/ continued commentary on ‘Common Prosperity’ and new commentary on ‘regulating the order of income distribution and the mechanism of wealth accumulation’
4/ Continued potential for tensions with US on various geopolitical issues. These factors have fueled concerns of negative policies for internet players and wider economy. We note specific commentary on internet players at the Congress was limited.

The bank adds that there’s “further de-coupling with the US” and the risks of restrictions in the supply of chip-sets, the trends in GDP growth, and further outbreaks.

“After the severe sell-off in March, when geopolitical fears on Russia RX reached highs, Tencent has tumbled a further c33 per cent to new lows. On our estimates the shares trade at 9x PE when adjusted for 3rd party stakes (c13x when not adjusting) very cheap vs history >30x PE average in last decade, although the industry wide nature of the selloff likely makes this less relevant short term,” says Exane/BNPP.

The bank sees a number of potential catalysts to watch in the coming weeks including:

i) The presence of any major Tencent games in the next batch of approvals
ii) Tencent Q3 results and outlook
iii) Any commentary from the authorities on the market / internet sector post Congress (a source of relief in March/April).

“Finally,” says the bank’s report, “we note Tencent is a highly FCF generative company with cUSD100bn of 3rd party stakes, and in the context of the current sell-off think a major acceleration of the buyback / cash return would be supportive – we await to hear more at results in November. From a Prosus perspective, while we see support from the ongoing buyback, we expect Tencent to be the key share price driver in the short to medium term. We rate Prosus outperform.”

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