After Its Massive Plunge This Year, Are Tencent Shares Finally A Buy?

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Tencent Holdings (OTC:TCEHY) seems to be facing an endless list of woes—including a deteriorating macro economic picture and most recently, increasing government scrutiny in China. And at least for now there’s no end in sight.

After Its Massive Plunge This Year, Are Tencent Shares Finally A Buy?

Tencent Weekly 2015-2018

Shares tumbled another 7% last week, bringing its total plunge for this year to almost 23%. It’s also been one of the worst performers on Hong Kong’s Hang Seng Index.

Government Controls, Trump Tariffs, Macro Headwinds

The latest setback for China’s Facebook (NASDAQ:FB) came when newswires last week reported that China is intensifying government controls over online gaming due to rising levels of myopia among children and teenagers in the world’s biggest gaming market. China’s education ministry, in a notice released late on August 30, directed the publishing regulator to limit the number of new online video games, take steps to restrict the time young people spend playing games and explore an age-appropriate system for players.

If these measures are implemented, they could further cloud Tencent’s outlook. The company held more than half of China’s mobile gaming market at the beginning of 2018, valued at 64.33 billion yuan ($9.4 billion) in that period, according to iResearch.

Tencent relies on new games to bring in and retain users on its WeChat messaging service, over which it sells in-game items and advertising to a billion-plus potential customers. Tencent hasn’t been able to cash in on the world’s most popular games, including Fortnite and PlayerUnknown’s Battlegrounds due to intensifying regulatory curbs over gaming approvals.

Last month, Tencent reported its first quarterly drop in profit in 13 years. Mobile gaming revenue fell 19% from the first quarter. “From a revenue growth perspective, gaming is a key area of weakness, our biggest game is not monetizable,” President Martin Lau said on a conference call on August 15, after releasing second-quarter earnings. “This is something that’s a little out of our control, but over time we’ll solve it.”

The slump Chinese technology stocks, including Tencent, are facing is unlikely to reverse course anytime soon as signs emerge that Chinese consumers, who powered the nation’s internet boom, are curbing spending amid the country’s escalating trade war with the US. China’s economy has also expanded at a slower pace in the second quarter. Retail sales growth slowed sharply in 2018 as well, to below 9% year-on-year, while Chinese company profit growth shrank to 16.2%, from 47% a year earlier for the second quarter.

This deteriorating macro picture means that the sluggish spell for Chinese tech companies will persist and may worsen further, even as the Sino-US trade war between the world’s two largest economies continues. According to media reports, US President Donald Trump is set to levy another $200-billion worth of tariffs on Chinese goods as soon as this week.

Strong Core Business, Robust Ecosystem

But does all this short-term weakness present China stock lovers with an opportunity to buy this tech giant at a discount? We believe this approach will likely pay off in the long run due to the strength of Tencent’s core business and its unique business model.

It’s tough to find a social network as resilient—and robust—as the one Tencet has created. With video blogging, instant messaging, plus a payment app all rolled into one, Tencent offers a dynamic ecosystem to over a billion subscribers. That’s hard to match.

In addition to Tencent’s WeChat messaging, the company is also investing in other growth areas such as cloud computing and digital payments. This will undoubtedly fuel growth momentum going forward.

As well, there remain many analysts who continue to believe staying faithful to the stock that delivered a 330% return to investors during the past five years will pay off yet again. Of the 37 analysts that follow the stock, 23 give it a “strong buy,” while 13 have a “buy” rating on Tencent. That’s unchanged from June despite the recent setbacks, according to Yahoo Finance.

Bottom Line

Here’s where we stand on the stock right now: we don’t think the current weakness in Tencent stock has run its course. If you already own shares and are in it for the long-term, it’s definitely worth holding on to. If you’re considering buying on the current dip, we think currently it’s better to stay on the sidelines and let this cycle mature.

As long as the US and China remain embroiled in the trade war, it’s tough to call a bottom for Tencent stock. New investors have a better chance of making money once this uncertainty blows over.

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