Swiss asset manager Pictet buys into Chinese video game maker behind ‘Knives Out’, sells Tencent stock

Swiss asset manager Pictet has been buying up shares in Chinese online video game developer NetEase, while taking a profit on Tencent Holdings, as the technology sector is now trading at a higher premium than overall global markets, according to Nolan Hoffmeyer, senior investment manager with Pictet’s thematic equities team.

NetEase, the developer of popular video game Knives Out, was weak in the first quarter because it did not release any major titles, meaning that unlike some technology companies it was not trading at very high valuations, said Hoffmeyer. Moreover, its video game pipeline is expected to improve this year, while its revenue was still growing by close to 30 per cent.

“NetEase is not one of those companies trading at very high valuations, so this is typically the kind of company we are looking for,” Hoffmeyer said at a media briefing.

The valuation of the technology sector remains well below the bubble in 2000, when its price to earnings ratio peaked at 44.2 times, compared with current levels of 17.2 times, said Hoffmeyer. However, the MSCI IT premium was slightly above the historical averages of MSCI World, in terms of absolute price to earnings difference.

At the same time, Pictet has been selling shares in Tencent, pushing the Chinese internet giant out of the top 10 holdings of the Pictet-Digital Fund, which has 25 per cent of its allocations in Asia, including Japan, and about 60 per cent invested in the United States.

Tencent continues to be a good company, but its valuation is elevated after a more than 100 per cent rally last year.

Hoffmeyer said he preferred investing in Tencent through South African media company Naspers, which owns 32 per cent of Tencent and is the Pictet-Digital Fund’s eighth largest holding. The fund is still exposed to growth at Tencent while, at the same time, it can benefit from the discount at which Naspers is trading relative to the market value of Tencent.

Tencent overtook NetEase to grab the top spot in terms of mobile apps revenue in the first quarter on the back of its blockbuster title Honour of Kings, while its free-to-play PlayerUnknown’s Battlegrounds also grabbed top spot as the most downloaded mobile game worldwide.

The Industrial and Commercial Bank of China said in a recent report Tencent’s major top line growth engines were rotating to segments beyond games. Renovating products will increase user activities on Tencent’s mobile platforms, supporting the expected fast growth in social advertising and financial technology in 2018. The bank values Tencent at HK$4,890 billion (US$623 billion), with a target price of HK$510.