Tencent stock slides to fresh one-year low as investors’ sentiment takes a battering
Tencent has lost US$190 billion of its market value within eight months, more than the entire market cap of Netflix, and twice that of Goldman Sachs
Shares in internet giant Tencent Holdings slipped further on Thursday, sinking to their lowest level in a year as already weak investor sentiment was battered by a flurry of negative news.
Concerns included reports that the authorities may impose a lofty tax on online video games as part of a tightening of regulations in the gaming industry, while funds are flowing out of Hong Kong at a rapid pace amid a crisis engulfing emerging markets.
On top of that, analysts said investors’ nerves may have been frazzled by an abrupt plunge in the shares of JD.com, a major e-commerce ally in which Tencent holds the largest stake, after the arrest of its CEO on suspicion of rape. The possibility of charges being brought against Richard Liu Qiangdong after his arrest in the US last Friday - even though he was released - has caused reputational damage to both Liu and the company.
Tencent’s stock has fallen by a third since its peak on January 23, wiping out around HK$1.5 trillion (US$190 billion) of market value within eight months. That’s more than the entire market capitalisation of Netflix, and equivalent to two Goldman Sachs.
In the past month alone, Tencent has shed 15 per cent, after Chinese regulators all but stopped approving new online video games and proposed tighter oversight to address what they see as an epidemic of gaming addiction among the country’s youth. As China’s largest video games company, Tencent derives 41 per cent of its total revenue from the business.
On Thursday, its share price fell to as low as HK$312.00, down 4 per cent from the previous session, after the Southern Metropolis Daily quoted anonymous sources as saying the government is mulling a special tax of as much as 35 per cent on each game, as well as a quota on the number of games released. It closed down 3.1 per cent at HK$314.60.
The Hang Seng Index dropped 1 per cent on Thursday to 26,974.82, following a 2.6 per cent fall on Wednesday, as concerns mounted about a new round of US tariffs that could hit US$200 billion of Chinese goods after the public comment period ends on September 6 in the US.
Hong Kong’s currency and equities have been weak in the past few months, as capital outflows accelerated in many emerging markets amid expectations of US interest rate increases and fears of a fully-fledged trade war between the US and China. On Wednesday, the Indian rupee dropped to a record low against the US dollar, while Indonesia’s currency hit the worst level in two decades.
“Tencent is one of the most heavily weighted stocks on the Hong Kong market. As funds sell off Hong Kong equities, it inevitably bears the brunt,” said Ben Kwong Man-bun, director of KGI Asia.
The company itself is also faced with weaker fundamentals as investors worry about impact of tighter regulations on the growth outlook and the stock’s already high valuations, he added.
On Thursday, Morgan Stanley issued a report and further cut its 12-month target price for Tencent to HK$420, mainly because of uncertainties surrounding the gaming business amid the regulatory headwinds. It is the second cut by the bank in less than a month.
China International Capital also said in a report on Thursday that Tencent’s stock would remain volatile in the short term, amid worries over its outlook as the gaming sector faces tighter scrutiny by regulators. The Chinese investment bank expected Tencent’s revenues from personal computer games to decrease 6 per cent year-on-year in the third quarter.
Possibly adding to the regulatory woes, JD.com, China’s second largest e-commerce firm and a long-time ally of Tencent, has suffered a sell-off in the US in the past two days after its founder and chief executive officer, Richard Liu Qiangdong, was arrested in the US on suspicion of rape at the end of last week.
“Investor confidence is a little fragile [about Tencent]. The fear may be intensified when they hear more negative news that could dent its outlook,” Kwong added.
Tencent formed a strategic partnership with JD in 2014, aiming to take on Alibaba in e-commerce. It is now JD’s largest shareholder, with an 18 per cent stake. The two companies have teamed up to buy stakes in retail chains and to empower retailers by providing technical support, a strategy Tencent calls “smart retail”, similar to Alibaba’s “New Retail” push to invest in traditional retail outlets and chains.
JD.com sank 6 per cent on Tuesday when the US market reopened after the Labour Day holiday and plunged by another 11 per cent on Wednesday. Local police in Minnesota said the investigation remained active following Liu’s release, while several US law firms said they are planning class-action lawsuits on behalf of JD’s shareholders as the company may have misled investors by disclosing false information about Liu’s case.
Tencent has seen its investment in JD.com shrink by US$1.3 billion within two days because of the latter’s stock rout.
Last month, at least 16 investment banks including Goldman Sachs, JP Morgan and Credit Suisse reduced their target prices for Tencent, after the company reported its first quarterly profit decline in 13 years, as its gaming business was affected by regulatory uncertainties. Bank of China International made the biggest cut, reducing its target price by 17 per cent to HK$390.