Tencent is having a tough time of late as the Chinese regulators decide to give it a good thrashing for becoming too important for the CCP. But this week brought even more bad news – now its fast-growing gaming business is under the spotlight for encouraging wayward Chinese consumers to spend too much of their time online slaying stuff rather than reading copies of Xi’s Marxist Leninist thought. Perish the thought.
The share price is down sharply, from a recent high at the end of January of around 766HKD to the current 456 HKD, a decline of over 40% from peak levels, By my calculations, that puts it on a PE of around 20. A useful summary of Tencent online can be found here from stockbroking service IG.
They observe that a “Refinitiv poll of 54 analysts maintains a long-term investment rating of ‘buy’ for Tencent Holdings (as of 3 August 2021) with a target price (mean of estimates) of 725.73 (Hong Kong dollars). The price target suggests the current share price to be trading at a 63% discount to a perceived fair value”. Technically IG suggests that the share price has “ started a new downtrend in 2021 and is currently testing support at the 444.30 level. A break of the 444.30 level would consider 404.50 as the next support target from the move.”. I’d say that a break below 400 is highly likely in truth.
This brings me to Prosus, which owns a huge stake in Tencent along with a more diversified portfolio of eCommerce businesses. The chart below from Sharepad shows the plummeting share price – it is down around 33% since a peak in January which suggests that the Prosus share price is mirroring, though not exactly, Tencent’s share price despite having a much bigger portfolio of assets. Prosus’ share price is up today by just under 4.5% to 73.7 euros but has been trading as low as 67 euros.
All of which makes me wonder whether the storms over Tencent and thus Prosus are already in the price. Tencent’s shares seem to be cheap on most fundamental measures thought they could become even cheaper. Prosus share price is itself a massive discount on that Tencent share price plus you get a basket of other fast-growing internet related stocks for free i.e it’s a triple play discount. Plus, Prosus and ultimate owner Naspers seems to be working hard to boot the share price through share purchases. I’m not a buyer of Prosus shares at anything over 70 euros but if the Prosus share price moves below 65 I might start to quietly nibble away at the shares.
One unrelated observation.
I own shares in UK-listed fintech ThinkSmart, largely as a way of accessing the buy now pay later story through its ClearPay UK business.
That is now part of the bigger Afterpay story, an Australian fintech which has been generating lots of headlines as an alternative to Klarna. This week brought news that Afterpay is itself being bought by Square in a $29bn (A$39bn; £21bn) transaction.
As far as I understand matters, the Thinksmart/Clearpay deal involved a clause which meant that a change of control in Afterpay gives Afterpay the right to exercise “its call option to purchase the remaining shares in Clearpay from ThinkSmart at any time following said change of control. The acquisition of Afterpay by Square Inc is expected to complete Q1 calendar 20222. “ That deal will be exercisable in cash.
In its last report and accounts ThinkSmart’s 10% holding in Clearpay UK was valued at £106.6m on 31st December. In addition, those accounts showed cash – at 31st December 2020 – of £6.9m though there is also likely to be a cash burn going on for the head office. So, by my calculations, ThinkSmart will be sitting on roughly £110m in cash at some point in Q1 next year.
That equates to a net asset value of around 102/103p a share. The current ThinkSmart share price is 91p. That equates to a free 12% upside option with very little risk. I also suspect that the share price might weaken further as sellers take cash.