Tencent shares' R480bn loss shows depth of China gloom

Tokyo - For a clue on how bearish foreign investors have become about Chinese stocks, take a look at Tencent, which Naspers has a 34% stake in.

The Shenzhen-based technology giant has tumbled 13% from its September record, wiping $35bn (R480.82bn) off the value of its shares, as overseas funds pulled money from Hong Kong and Chinese equities. The company’s large weighting on the Hang Seng Index - at 10% - helped make Hong Kong’s benchmark stock gauge one of the world’s worst performers last quarter.

The Naspers share price dropped from R2 413.40 a share on 25 October 2016 to its price of R2 034.77 at the close of Tuesday trade on the JSE.

Tencent, which has more buy ratings than any other in Hong Kong, is a victim of fund redemption pressures, according to Asset Management One. Investors pulled about $409m from exchange-traded funds that buy Chinese and Hong Kong stocks in the week through December 21 as concern grew over a weakening yuan and tighter liquidity.

“If there are fund redemptions, it’s hard to avoid selling Tencent because its weighting is so big," said Toshihiko Takamoto, a Singapore-based portfolio manager at Asset Management One.

Tencent fell 0.4% at the midday break, while Naspers ended Tuesday on the JSE 1.03% higher. The Tencent stock was the second-largest drag on the Hang Seng Index in the fourth quarter, after AIA. The Hang Seng Index tumbled 5.6% in the period as China’s currency plumbed lows not seen since 2008 against the dollar and concern about rising money market rates spurred a record meltdown in the nation’s sovereign debt.

Such has been the exodus that the top US ETF focusing on China suffered the biggest outflows among emerging markets, sending total assets to the lowest level in a decade.

US Federal Reserve officials last month increased their projections for interest-rate increases this year, triggering a surge in the dollar and Treasury yields. Higher US bond yields will cause outflows from emerging markets and Hong Kong, Australia & New Zealand Banking Group has warned.

The selloff hasn’t shaken analysts’ faith in the stock. Tencent has 43 buy ratings, 2 neutral recommendations and zero sells, according to analysts tracked by Bloomberg. The average 12-month target price implies a 26% advance over the next 12 months.

Analysts have their reasons to be optimistic. Tencent shares have rebounded after each selloff to make new highs during its 12-year listing, while the stock is the best performer on the Hang Seng Index in the past five years with a 500% gain.

The company reported a 43% jump in its third-quarter net income as its ability to attract Chinese gamers and social media helped fuel advertising growth. Profit is expected to continue growing for at least three more years, according to data compiled by Bloomberg.

There are signs investors are turning less bearish. The stock gained 5.6% last week, its first weekly advance since late October, and rebounding from a five-month low.

“If you focus only on its fundamentals, the stock is still a buy," Takamoto said.

* Disclaimer: Fin24 is owned by Media24, a company owned by Naspers.