Strong rally fuels gamble on Tencent

Call warrants for the internet giant are drawing enthusiastic response from investors although their aggressive pricing means high risks

PUBLISHED : Saturday, 22 February, 2014, 1:15am
UPDATED : Saturday, 22 February, 2014, 1:15am

A HK$1,100 price tag for Tencent's shares - almost double the current level - is being dangled in front of investors willing to take a punt on financial derivatives as a means of tapping another route to riches on the back of the internet giant's spectacular stock rally.

BNP Paribas will offer a call warrant on Tencent reaching the lofty price within 18 months. The bank is scheduled to issue the product on Monday.

Propelled by the overwhelming success of WeChat, its instant-messaging application developed for mobile devices, the mainland company's shares almost doubled in value to end last year at HK$494.60, against HK$249 at the end of 2012.

Shirley Kwok, a director and head of retail and listed product sales at BNP, said the bank observed that "a lot of capital keeps flowing into Tencent recently".

Although it’s difficult to forecast its share price … I see no risk for Tencent

"We saw that investors have a strong interest in Tencent," she said. "We are launching the warrant products because of this interest."

A call warrant allows the holder to buy the underlying share at a specific price on or before a specified date.

BNP yesterday launched a call warrant for Tencent at HK$940 a share by May 5 next year. "The trading amount was about HK$1.4 million [yesterday]," Kwok said. "The volume was not particularly large because this is a new product and we didn't promote it very much."

The call warrant scheduled for the Monday launch is for Tencent to reach HK$1,100 by August 4 next year.

Tencent's shares have added 17.4 per cent this year, compared with a 3.2 per cent fall in the Hang Seng Index. The stock rose 2.8 per cent to HK$580.50 yesterday.

Kwok said the call warrants were being priced in line with market sentiment towards Tencent.

"We also have some put warrant products, but recently most investors are favouring call warrants," she said.

A put warrant allows the holder to sell the underlying asset from the warrant issuer at a specific price at maturity.

Kwok cautions investors that warrants come with high risks.

Christfund Securities research director Simon Lam Ka-hang views the HK$1,100 benchmark as aggressive pricing. "This is a gamble, not an investment," he said, noting that call warrants were typically priced at a premium of 20 to 30 per cent above the underlying shares.

He said trading in Tencent warrants was attracting large volumes. "Every day, the trading amount exceeds HK$100 million. There is strong demand."

Lam said the odds were slim of the technology giant coming up with another product as dominant as WeChat, which boasts 272 million monthly active users.

Guosen Securities analyst Bill Fan said Tencent was strengthening its presence in the mobile internet sector through acquisitions. "Through the acquisitions, Tencent will permeate every aspect of our life on the WeChat platform," he said.

On Wednesday, Tencent bought 20 per cent of Dianping, China's answer to American review site Yelp.

"Tencent is collaborating with companies in different industries, looking for a way to commercialise WeChat," Fan said. "Although it's difficult to forecast its share price in 11/2 years, given the fluctuations in the shares of dotcom firms, for the short term I see no risk for Tencent."