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What’s in store for the Tencent share price following approval of its Sogou deal?

The storm created by Beijing’s anti-trust regulators has meant the Tencent share price [TCEHY] has faced numerous headwinds in 2021. It is more or less flat in the year to date,  sitting at $71.47 at the close on 16 July, slightly down from $72.85 on 4 January.

The Tencent share price is currently trading around 6% above its year-to-date low of $67.30 set on 8 July, but is 28% down from its all-time high of $99.40 set on 12 February.

While there’s no getting away from the fact that 2021 has been a horrendous year for China’s big tech stocks, the performance of the Tencent share price compared with other stocks suggests the conglomerate is in a better position than most to ride out the storm. Alibaba [BABA] is down 8.9% year to date, JD.com [JD] 14% and Baidu [BIDU] just short of 17%.

28%

Tencent's share price fall from all-time high in February

  

The Tencent share price could still go into free fall in the second half of the year. While its music business, Tencent Music [TME], China’s answer to Spotify [SPOT], will not be broken up, it’s expected that it will have to give up music exclusivity, and this could put some of its holdings at risk.

Nonetheless, Ma Huateng, CEO of Tencent, has been keeping a low profile and paying close attention to government relations, strengthening the group’s hand, according to the Financial Times, and this should cushion any blow to the Tencent share price. “Keeping quiet will help you make a fortune,” Tencent employees told the publication.

 

Sogou adds to Tencent’s roster

The suggestion that Pony Ma is in China’s good books right now could partly explain why Beijing regulators cleared the way for Tencent’s $3.5bn acquisition of the country’s second-biggest search engine, Sogou [SOGO]. The Tencent share price jumped a few percentage points in reaction to the news.

Though subject to data security conditions being met, once the deal passes then it’ll help Tencent to rival Baidu, whose search engine is by far the most popular in China, with a market share of almost 80% in June 2021.

$3.5billion

Valuation of Tencent's acquisition of Sogou

  

News of the Sogou acquisition came not even a week after Beijing regulators blocked Tencent’s plans to merge two video-gaming platforms, Huya [HUYA] and DouYu. The deal was rejected on the grounds that Tencent has big stakes in both companies and a merger would essentially eliminate competition.

There is optimism that the Sogou deal being cleared will pave the way for future acquisitions to be approved.

But the Tencent share price and other big tech stocks are far from out of the woods.

On 7 July, it was reported that the country’s regulators had handed out 22 fines of half a million yuan for irregularities in years-old mergers dating back to 2011. Five of these fines were issued to Tencent, according to the South China Morning Post.

 

Will Tencent get closer to Alibaba?

The hardest hit by the latest fines were ride-sharing app Didi [DIDI] with eight and retail giant Alibaba with six.

With China’s big tech coming under increasing pressure, there are signs that Alibaba and Tencent may cosy up. Alibaba has reportedly explored the idea of launching its bargain marketplace and Pinduoduo [PDD] competitor, Taobao Deals, on Tencent’s WeChat. This would enable Taobao Deals merchants to use WeChat Pay.

Beijing has been putting a stop to merchants being forced to sign exclusivity deals with platforms, so an Alibaba-Tencent tie-up could be seen as a means to appease regulators.

While such a move might make business sense, analysts aren’t convinced it would be beneficial to both the Alibaba and the Tencent share price.

In a note to clients that was seen by Barron’s, Bernstein’s Robin Zhu argued the two companies will strike “a balance between satisfying regulator demands for interoperability and maintaining status quo,” — that is, their long-running rivalry.

“I think Tencent will ultimately be the net beneficiary of such a move as ecommerce is only one source of Tencent’s revenues” - Briand Bandsma

 

Zhu added he expected Tencent to get the most out of a tie-up. If Taobao and WeChat Pay were integrated, Tencent could glean insight into user consumption and behaviour.

In his note to clients, also seen by Barron’s, Briand Bandsma of Vontobel argued the traffic to Tencent’s apps would outweigh any increased competition it faces in the ecommerce sector.

“I think Tencent will ultimately be the net beneficiary of such a move as ecommerce is only one source of Tencent’s revenues,” Bandsma wrote.

Unsurprisingly, funds that are heavy on Chinese big tech and ecommerce have performed poorly in 2021. The iShares MSCI China ETF [MCHI] has a daily total return of -4% and the Invesco Golden Dragon China ETF [PGJ] has returned -15.6% in the year to date.

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