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Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

I have turned more positive on Tencent shares recently (please see <a href="https://www.smartkarma.com/insights/tencent-700-hk-when-to-catch-a-falling-knife" target="_blank" data-smartkarma-citation="insights:55148" rel="noopener">Tencent (700 HK): When to Catch a Falling Knife</a>) after the share price plummeted from the peak in March.  While we may still see some residual regulatory measures rumbling through the China tech industry after the September 1 adoption of the new Data Privacy Law, Tencent's more reasonable value should mitigate further downside risks, in my view. Three reasons why I am able to exhale comfortably on Tencent: <ul>
<li>
Tencent's overall revenue grew 20% YoY.  This growth would normally be mediocre by Tencent's standards, but in comparison to the extraordinary growth year 2020, this is solid.  </li>
<li>
Fintech business remains unencumbered.  Fintech now makes up 30% of Tencent's total revenues and the segment gross margin was 32%, an increase of 3.1% points. </li>
<li>
Tencent shares trade at 23.5x FY21 consensus earnings. This is inexpensive and suggests that at least some of the regulatory risks are priced in.  </li>
</ul>The key risk remains on whether Tencent would be required to transfer user data as part of the data privacy law measures.  I do not believe this is the case.

I have turned more positive on Tencent shares recently (please see Tencent (700 HK): When to Catch a Falling Knife) after the share price plummeted from the peak in March.  While we may still see some residual regulatory measures rumbling through the China tech industry after the September 1 adoption of the new Data Privacy Law, Tencent's more reasonable value should mitigate further downside risks, in my view. Three reasons why I am able to exhale comfortably on Tencent: 

Tencent's overall revenue grew 20% YoY.  This growth would normally be mediocre by Tencent's standards, but in comparison to the extraordinary growth year 2020, this is solid.  

Fintech business remains unencumbered.  Fintech now makes up 30% of Tencent's total revenues and the segment gross margin was 32%, an increase of 3.1% points. 

Tencent shares trade at 23.5x FY21 consensus earnings. This is inexpensive and suggests that at least some of the regulatory risks are priced in.  
The key risk remains on whether Tencent would be required to transfer user data as part of the data privacy law measures.  I do not believe this is the case.         

Tencent (700 HK): No Longer Roaring, but the Price Is Right