Tencent’s [0700.HK] share price has had a less than stellar 2021. State intervention has seen a double-digit decline in the stock of the Chinese gaming giant and owner of WeChat.
Measures have included the regulator slowing down the approval of new online games and decisions on how social media platforms operate. Not helping investor confidence in China tech companies is news that ride-hailing firm DiDi [DIDI] would be delisting in New York and relisting in Hong Kong following heavy pressure from Beijing.
Yet with Tencent’s share price having declined further at the back end of November, is this the time for investors to consider picking the stock in the hope that next year it's safe to invest in China tech once again?
Tencent’s share price under pressure from state intervention
Tencent’s share price has dropped almost 18% so far this year (through 7 December). The company, along with other China tech stocks, has been hit by increasing state-led regulation on the sector, which has seen it fined for anti-competition violations over its 2016 purchase of China Music. Tencent was also temporarily forced to suspend new user registrations for its WeChat app.
Adding to the woes is Xi Jinping’s government cracking down on the amount of time minors can play video games online. Under rules brought into force in August, children in the country can only play video games for one hour on Fridays, the weekend and holidays. In September, the government then announced it would slow down the approval for new online video games.
Both of these measures are a problem for Tencent as some of its biggest money spinners are hit titles like Honour of Kings and PUGB Mobile. Unsurprisingly, Tencent’s share price took a hit following the announcements.
Beijing has also come down hard on the country’s social media platforms and the practice of blocking links to other sites. In an effort to appease regulators, Tencent will soon allow WeChat groups to post links to external sites such as Alibaba. The tech firm had held off the move for fears of compromising the user experience and driving users to other platforms.
WeChat’s concession is a big deal. The platform is used by over a billion people in China and controls a vast chunk of the country’s online world.
Some commentators argue that the worst may be over when it comes to state intervention in China tech. However, the regulator isn’t afraid to slap a hefty fine on its tech companies. At the end of November, Tencent-owned Tenpay was hit with a 2.8 million yuan (US$434,792) for failing to comply with regulations over foreign exchange sales.
Could Tencent’s share price be a bargain?
Appeasing regulators could help the investment case for Tencent, along with helping the company avoid further regulatory fines that have become de rigueur for China’s tech sector.
Yet there are positive reasons for investors to consider Tencent. The company is expanding beyond its gaming and social media offering and has been pioneering its own semiconductors to overcome the supply chain crisis. At the start of November, Tencent announced that it had designed three new chips: an artificial intelligence chip called Zixiao, a transcoding chip and a networking chip for cloud computing processes.
The move comes as China looks to become self-sufficient in this critical technology - a strategic initiative for the country at a state level. To manufacturer leading edge chips the country relies on just three overseas companies — Intel, TSMC and Samsung.
Tencent Q3 revenues were up 13% year-on-year
Tencent is also a strong performer financially. In the third quarter, profit came in at RMB40bn ($6.2bn), an increase of 3% year-on-year. Revenue was RMB142.4bn ($22bn), an increase of 13% year-on-year.
In a statement accompanying the third quarter numbers, Ma Huateng, Chairman and CEO of Tencent, was at pains to state just how aligned the company was with what he described as ‘the new regulatory environment’ and that Tencent’s ‘industry-leading efforts’ had‘ significantly reduced minors' game time and spending,
Among the analysts polled by Refiniv, Tencent’s share price has an average RMB612.14 price target, hitting this would see a 32% upside on Tuesday’s close. The highest price target is RMB819.98 and the lowest RMB349.57. However, anyone interested in Tencent or other China tech companies should be well aware of the investment risk they carry right now.
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