Category Investments

Stock Pick of the Week

26 November 2021 Momentum Securities


About: Tencent is a world-leading internet and technology company that develops innovative products and services to improve the quality of life of people around the world. Founded in 1998 with its headquarters in Shenzhen, China, Tencent's guiding principle is to use technology for good.

Nancy Bambo, analyst at Momentum Securities, shares her insights.

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Our stock pick for the week is an Asian tech giant, one that we have spoken of before – namely Tencent. We believe that the stock still has money to offer, currently trading at a P/E (price-to-earnings ratio) of about 29x, below its average P/E of about 38x. We anticipate good EPS (earnings per share) growth over the coming three years, [and] we are comfortable with the debt levels as well as the overall balance sheet.

Looking at the regulatory side of things, and the impact thereof on Tencent, we've seen the stock had a spike this year of HK$ 766, and dropped to a low of HK$ 421 this year.

It has since recovered from that low, and is down about 14% year-to-date at a price just below KH$ 500. When we look at the portion of revenue impacted by the relevant regulations, as has been addressed in one of our previous videos, the portion of revenue that comes from users below the ages of 18 within the domestic gaming division as at the third quarter of 2020 was about 4.8%. That is limiting the overall impact on group revenue, and that revenue portion has thus been reduced this year to 1.1% of domestic gaming revenue.

Still on the regulatory side of things, there are pros and cons to it, and the positive side is that, when we look at China's five-year plan towards common prosperity, one of the goals is to promote foreign direct investment and financial market liberalisation. For this to happen, a conducive investing environment needs to be created, so we can assume that investors will be considered when it comes to the various decisions that needs to be made.

So, given the reasons that I have mentioned above – like the EPS growth as well as the valuation and also the fact that Tencent holds the number one and the number two position in various industries that it operates in – we are comfortable to hold the stock.

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