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Tencent Holdings – FHC Restructure On Its Way

Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward

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Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

On Monday, 12 April 2021, PBoC stated that Ant Group met with regulators and announced its business restructuring to comply with new regulations.  (See our report, <a href="https://www.smartkarma.com/insights/alibaba-baba-us-ant-group-pay-get-out-move-forward" target="_blank" data-smartkarma-citation="insights:50254" rel="noopener">Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward)</a> While the media and the global investment community focused on Ant Group because of the much-publicized canceled IPO in November 2020, we believe the potential valuation risk of Tencent <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> and its associate, Webank, was overlooked, in my view.This report highlights three key thoughts:<ul>
<li>While Ant Group’s devaluation weighed down Alibaba’s shares, Tencent’s shares did not fully price in the adverse impact of the regulatory change.</li>
<li>Tencent’s shares could be overvalued by 20% as the market did not reflect the lower fintech value.</li>
<li>Even though Ant Group’s fintech business is larger (see our direct comparison chart), I argue that the impact on Tencent’s shares is bigger than it does for <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> because Tencent’s fintech business is wholly owned compared to Alibaba’s 33% stake in Ant Group. </li>
</ul>In this report, we also provide a detailed look at Tencent’s fintech business and WeBank’s financials based on WeBank’s 2019 annual report.

On Monday, 12 April 2021, PBoC stated that Ant Group met with regulators and announced its business restructuring to comply with new regulations.  (See our report, Alibaba (BABA US): Ant Group - Pay, Get Out, Move Forward) While the media and the global investment community focused on Ant Group because of the much-publicized canceled IPO in November 2020, we believe the potential valuation risk of Tencent Tencent Holdings (700 HK) and its associate, Webank, was overlooked, in my view.This report highlights three key thoughts:
While Ant Group’s devaluation weighed down Alibaba’s shares, Tencent’s shares did not fully price in the adverse impact of the regulatory change.
Tencent’s shares could be overvalued by 20% as the market did not reflect the lower fintech value.
Even though Ant Group’s fintech business is larger (see our direct comparison chart), I argue that the impact on Tencent’s shares is bigger than it does for Alibaba Group (BABA US) because Tencent’s fintech business is wholly owned compared to Alibaba’s 33% stake in Ant Group. 
In this report, we also provide a detailed look at Tencent’s fintech business and WeBank’s financials based on WeBank’s 2019 annual report.

Tencent (700 HK): Fintech Risk Is Lurking