Tencent has repurchased nearly HKD 40 billion worth of stocks this year.

Author | Huang Yu

Recently, the stock price of PDD has soared, while TENCENT, which holds about 15% of PDD's shares, has continued to be under pressure. In order to hedge against the pressure of the reduction in holdings by the major shareholder from South Africa, maintain stock price stability, and protect the interests of investors, TENCENT has initiated multiple large-scale repurchases starting in 2023, which is rare in the capital market.

As the largest shareholder of TENCENT, South African media giant Naspers has enjoyed the dividends of TENCENT's vigorous development over the past twenty years, but it has also broken the promise of "holding TENCENT for ten thousand years" and launched a long-term reduction plan in June last year.

On November 30th, the latest performance report disclosed by Prosus (the holding company of Naspers and the parent company of MIH) showed that in the first half of the fiscal year (from April to September this year), it sold about 1% of TENCENT's shares, reducing its stake from 26.2% to about 25%, and gaining a profit of 4 billion US dollars; from October to November 24th, Prosus further sold about 26.22 million shares of TENCENT, with a profit of 1 billion US dollars.

Since announcing the reduction plan more than a year ago, Prosus has reduced its holdings of TENCENT shares by about 4%, with cumulative cash-out exceeding 10 billion US dollars.

When announcing the launch of the reduction plan, Prosus stated that the main purpose is to obtain funds to support Prosus and Naspers' share repurchase plan, thereby increasing its net asset value per share (NAV).

It is worth noting that Prosus has transformed into an investment company many years ago, and its most important asset is the massive amount of TENCENT shares it holds. However, Prosus' stock price has been severely discounted relative to its NAV per share for a long time, and the reduction and repurchase is an attempt to narrow this gap.

This is a long-term process, and Prosus obviously does not want to bring negative impact on TENCENT's stock price. Therefore, Prosus also emphasized that it still has great confidence in the long-term prospects of TENCENT, and the repurchase program will actually increase its "per share TENCENT content".

At the same time, Prosus expects that the average number of TENCENT shares sold per day will not exceed 3%-5% of TENCENT's average daily trading volume. The purpose of this move is also obvious, which is to minimize the volatility of the reduction plan on TENCENT's stock price.

However, despite this, the actions of the major shareholder still have a short-term impact on market sentiment, and TENCENT's stock price once fell by about 6% on the day the reduction plan was announced.

Against this background, in order to boost investor confidence, TENCENT has also increased its share repurchase efforts in recent years. In 2022, TENCENT has repurchased approximately 107 million shares, with a total expenditure of over HKD 33.8 billion.

This year, TENCENT has once again set a new record for the number and amount of share repurchases. According to incomplete statistics from Wall Street News, as of November 30th, TENCENT has repurchased at least 106 times this year, with a total repurchase amount of approximately HKD 39.4 billion.

Analysts believe that in 2023, TENCENT's expenditure on share repurchases is expected to exceed HKD 40 billion.

Since TENCENT initiated its share repurchase program, it has implemented a sustainable and long-term plan, which has to some extent offset the pressure from the reduction of its major shareholder in South Africa and safeguarded the interests of investors.

From the perspective of TENCENT Holdings, in addition to offsetting the pressure from the reduction of its major shareholder in South Africa, the share repurchases also reflect the company's recognition of the current stock value.

Over the past year, the negative factors caused by the reduction of major shareholders have weakened. Before the announcement of the reduction action by the major shareholder on June 27th last year, TENCENT's stock price was approximately HKD 362 per share. After experiencing a roller coaster ride that fell below HKD 200, it closed at HKD 319.8 per share on December 1st.

Of course, compared to the peak period, TENCENT's market value has shrunk significantly in recent years. Some investors believe that in addition to the pressure brought by the reduction of major shareholders, more negative factors affecting TENCENT's stock price come from the regulation of the Internet industry and the slowdown in performance growth.

The landscape of China's Internet industry is also being reshaped. By the first half of this year, ByteDance's revenue has surpassed TENCENT, and recently PDD's market value has temporarily exceeded Alibaba. The two long-standing giants in the Internet industry, Alibaba and TENCENT, have been under pressure from newcomers.

Ma Huateng and Martin Lau need to come up with more innovative measures to maintain the dominant positions of TENCENT and Alibaba.

Whether TENCENT can return to its past glory in the long run does not depend on the reduction of major shareholders or the intensity of share repurchases, but on whether it can find new growth points and open up a strong second curve of growth.

Against the backdrop of the gaming business, which is one of its main sources of revenue, encountering growth bottlenecks, TENCENT's management has begun to emphasize the commercial value of the WeChat ecosystem.

Ma Huateng, Chairman and CEO of TENCENT, pointed out that emerging businesses such as Video Accounts and mini-games have contributed high-profit-margin revenue to TENCENT in the third quarter of this year. Due to the existence of Video Accounts, mini-program games, search, and e-commerce, even in a given three-month period without the release of large-scale games, TENCENT's business can still maintain a relatively healthy revenue growth rate.

It can be foreseen that the WeChat ecosystem, with Video Accounts as its core, may replace games as the key business driving TENCENT's new round of valuation increase. In addition, TENCENT's future growth points and highlights also include AI-based large-scale models, cloud-based To B business, and more. 22 years ago, Tencent, which had been established for less than three years, faced financial difficulties. At that time, MIH, a subsidiary of Naspers, suddenly entered the scene and acquired 32.8% of Tencent's shares for less than $20 million. This was the most outstanding investment in the history of the media industry, with a peak return of over 8,000 times.

And now, Tencent seems to have reached a new turning point. The management of Tencent stated in a recent third-quarter conference call that the valuation of Chinese internet stocks has almost reached its historical low.

Is it time for investors to once again place their bets on Tencent?