A reasonable value cash cow despite mixed results

Tencent Holdings Limited (TCEHY) is one of China’s elite behemoths that has radically transformed the country’s economy over the past two decades. The company is involved in virtually every technology sub-sector, unlocking operational efficiency on a scale that only a handful of other companies can execute.

Tencent shares feature one of the greatest stories of shareholder value creation in history, let alone the Chinese and Hong Kong stock markets. Specifically, in its initial listing in Hong Kong, Tencent shares have generated an outstanding return of more than 45,000% since the company’s IPO. In fact, that includes the substantial drop in the share price since the start of the year.

Tencent’s growth has slowed particularly lately, with the Chinese government’s crackdown on big data and easing economies of scale affecting the company’s metrics. That said, growth remains impressive in certain segments of Tencent, while the company should continue to be a cash cow with multiple moats to support its longevity and future success.

I am bullish on the stock.

Mixed results

Tencent released its fourth quarter results last week, with somewhat mixed numbers.

Adjusted EPS was $0.40 (all figures converted to USD), implying a 2.3% year-over-year gain, while total revenue increased by 8% to $22.6 billion. In fact, it marks another quarterly revenue record for Tencent.

Revenues were boosted by improved results from Tencent’s value-added services and domestic and international gaming segments. They increased by 7%, 1% and 34% respectively in each of these segments.

On the most worrying side of the report, Tencent’s social media division has been affected by Chinese regulatory crackdown on the industry. Social media ad revenue fell about 13% to $3.38 billion, even as Weixin’s daily active advertisers grew more than 30% from a year ago.

Still, the report contained many salient facts. Revenue from fintech and business services, for example, rose about 25% to $7.53 billion. Moreover, despite Tencent’s continued investment in all of its businesses, the company has still managed to maintain rather juicy margins. Specifically, gross and net margins were 43.9% and 17.9%, respectively.

Return on capital and valuation

Until recently, Tencent exhibited an 11-year dividend growth streak. However, the balance sheet is now complete, with the company announcing its intention to pay a dividend of HKD 1.60 per share corresponding to the 2021 financial year, similar to the previous year.

However, with its stock price declining for a few months now, Tencent has significantly increased its share buybacks. The company repurchased about $786.3 million worth of stock in fiscal 2021, up 175% from a year ago.

Yet, this amount is only a fraction of Tencent’s market capitalization and barely enough to raise the shares. The result of a falling share price versus improving earnings led to a sharp contraction in valuations.

Assuming the company posts EPS closer to $2.20 next year, implying modest growth (fiscal 2021 was around $2.04), Tencent is trading near 21.5 times its forward earnings, one of the lowest multiples the stock has seen in the past decade.

The Taking of Wall Street

On Wall Street, Tencent Holdings has a strong buy consensus rating, based on six unanimous buy ratings over the past three months.

At $76.88, the average projection for Tencent Holdings shares implies 63.3% upside potential.


Tencent’s latest results were weak in some parts but strong in others. In general, Tencent’s expansion pace has certainly slowed down, and the halt in dividend growth has certainly not been pleasant. That said, buybacks have increased and the business remains very profitable.

Due to its attractive valuation and the general fluke of Tencent in the Chinese tech universe, I am bullish on the stock. Still, investors should beware of the risks associated with Tencent’s slowdown.

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