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Furthermore, the Tencent share price has dropped 9.2% in the past months alone, although this recent sell-off may have less to do with the company’s financials and more to do with negative market sentiment. The fall has been driven by a combination of increasing tensions between China and US, and Beijing regulators looking to rein in the country’s big tech.
Despite this, there are suggestions that the Tencent share price has further to fall in the near term.
Are the bears coming for Tencent?
According to a Bloomberg report on 29 June, investors in Asia seem to be turning bearish on the stock.
June was the first month of outflow since May 2020. As of the 28th of the month, mainland investors had sold a total of HK$11.2bn ($1.4bn). Compare this to the start of the year, when investors piled into the stock, gobbling up HK$91bn ($11.7bn) worth of shares in January alone.
The Bloomberg report highlights how mainland investors make up around a third of Tencent’s daily turnover. They currently hold about 7% of shares, and the sell-off is expected to continue, which could push the Tencent share price down further.
Dai Ming, a fund manager at Huichen Asset Management, explained to Bloomberg that mainland investors have had concerns about Tencent’s ambitious spending plans to help it catch up with its peers. This is set to have an impact on its profit margin.
In its Q1 2021 earnings call, Tencent indicated that it would be ramping up investment in low-margin areas of its business, such as cloud computing and streaming services.
Growth in Tencent’s cloud business has been soft in recent quarters, especially when compared to that of Alibaba, for instance. In the first three months of 2021, while Alibaba had the lion’s share of the cloud market in China (39.8%), Tencent’s share was just 13.7%.
While Tencent’s full revenue for 2021 is expected to grow versus 2020 revenue, growth in earnings per share (EPS) is likely to be slower or decline year-over-year.
Tencent’s spending will depreciate near-term earnings, and the company’s management has said it’s expecting profit margin for 2021 to be between zero and the 22% reported in the first quarter.
“The shares won’t do well when there is a lack of liquidity and earnings support. Mainland traders’ selling of Tencent is likely to continue in the second half [of 2021],” Ming told Bloomberg.
How appealing is Tencent’s share price?
At its current level, the Tencent share price could be an attractive entry point.
“Instead of fearing this scenario for the highly profitable Tencent, shareholders should be celebrating the news,” Billy Duberstein wrote in The Motley Fool in May.
Duberstein added that it’s no surprise to see the company is planning to invest big in cloud computing in a bid to capitalise on pandemic-accelerated digital enterprise trends.
The stock is the top holding in the Invesco China Technology ETF [CQQQ], in which it had a weighting of 9.21% as of 12 July. The fund has fallen 4.8% so far this year (through 12 July).
Speaking to CNBC, Gina Sanchez, CEO of Chantico Global, argued the answer to whether you should invest in Chinese big tech depends on what your thesis is for Beijing’s crackdown.
“If this is truly just an anti-trust, anti-competitiveness push, then you can argue that a lot of the bad news is really priced into these stocks. They have just gotten pummelled and the top stocks in the CQQQ are all below their five-year and 10-year P/E levels, which is to say they could look very attractive,” said Sanchez.
If Beijing’s crackdown is more to do with reining big tech in so “corporates go along with [China’s] social agenda” then it could “morph into something bigger”. And this would have a negative impact on the Tencent share price.
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