Tencent "bottom fishing" Tencent: A journey of a 100 billion repurchase

In the first half of this year, statistics show that at least 180 Hong Kong-listed companies have implemented share repurchases, with a total amount of HKD 121 billion, reaching a historical high for the same period. Especially in internet companies, almost all shareholders' return schemes have been significantly enhanced, marking the beginning of a new era of internet shareholder returns. Among these companies, Tencent, the "stabilizing factor" of the Hong Kong stock market, is undoubtedly the most prominent. In the first half of this year, Tencent contributed over HKD 52.3 billion to the share repurchases in the Hong Kong stock market, accounting for over 40% of the total, firmly holding the title of "Repurchase King" in the Hong Kong stock market. In the second quarter, Tencent's quarterly repurchase amount reached HKD 37.5 billion, doubling from HKD 14.8 billion in the first quarter, with the repurchase average price increasing from HKD 290.6 to HKD 361.8, a nearly 25% increase. It is worth mentioning that Tencent's repurchase amount this year will exceed HKD 100 billion, doubling from last year's HKD 49 billion. What does a hundred billion repurchase plan mean? This amount is the sum of Tencent's total repurchase amount over the past decade, which indirectly proves the management's confidence in future development and the importance attached to investors' demands. Through various means such as repurchase cancellation, dividends, and physical distribution, Tencent not only enhances its performance but also effectively rewards shareholders in the capital market. I. The significance of the hundred billion repurchase is actively emerging Looking back over the past two years, since Tencent's major shareholder Prosus began reducing its holdings, the stock price has been somewhat suppressed. Especially when the performance of Hong Kong stocks is poor, there have been regular trading behaviors in the market. For example, Hong Kong-listed companies have a "repurchase silent period" in the month before the financial report is released, during which repurchases are not allowed. This led to significant upward pressure on the stock price whenever Tencent entered the repurchase silent period before last year. As shown in the data below, before the end of 2023, out of 5 silent periods, only in October-November 2022 did Tencent's stock price rise, while it fell at other times. However, since the end of last year, Tencent's stock price has risen in the two consecutive silent periods. Especially after starting the hundred billion repurchase plan this year, the repurchase volume has far exceeded the reduction in holdings by major shareholders. Therefore, whether on normal trading days when repurchases are allowed or during silent periods, the impact of major shareholder reductions can now be ignored, and this point is becoming a market consensus.

For example, during the repurchase silent period from January to March this year, which happened to be the worst period for Hong Kong stocks in the first half of the year, the Hang Seng Index fell to 14,800 points at one point. Tencent's performance during this period was significantly better than before, even though the short interest ratio reached 20% at one point, the stock price did not fall, ultimately recording a 6% range increase. After disclosing better-than-expected 2023 annual reports at the end of March and restarting repurchases, Tencent's stock price performed even better. In the second quarter, Tencent's stock price rose by nearly 25% During the same period, the Hang Seng Index and the Hang Seng Tech Index both experienced significant declines in the second quarter, dropping by over 10% after reaching their peaks. Currently, they have only risen by 8% and 4% respectively. Tencent has significantly outperformed the Hong Kong stock market with a 25% increase. Behind this phenomenon, undoubtedly, the doubled billion-dollar buyback plan from last year has played a crucial role. More importantly, with the repurchased shares being cancelled, Tencent's share capital has been on a downward trend for three consecutive years. Starting from 2021, Tencent's total share capital has decreased from 9.608 billion shares to 9.355 billion shares. In the first quarter of this year, Tencent has reduced its ordinary shares by 1.1% compared to the previous quarter, and the repurchased shares since the beginning of this year are also being gradually cancelled. This trend will continue to increase earnings per share, further enhancing shareholder value. (Caption) Starting from 2022, Tencent has increased its buyback efforts, and as the buybacks are cancelled, the company's total share capital is gradually decreasing. According to the statistics of the prominent Snowball V "Cang Zong Jia Cuo", Tencent's weekly repurchase amount this year has exceeded Prosus' selling amount. For example, during the week of June 17-21, Prosus sold 2.5 million shares of Tencent, while Tencent repurchased 13.08 million shares, with the selling amount accounting for only 2.72% of the weekly trading volume, far less than the repurchase amount. In fact, even during the silent period of buybacks, Prosus' selling amount only accounts for about 2-5% of the weekly trading volume. Overall, according to the publicly disclosed data from the pan-European stock exchange, Prosus repurchased its own shares for a total of $1.76 billion in the second quarter of this year, slightly higher than the $1.6 billion in the previous quarter. In the first half of the year, it has repurchased a total of $3.36 billion, all of which were obtained through selling Tencent shares. Due to Tencent's buyback amount in this quarter being more than double that of the previous quarter, the gap with Prosus' share sales continues to widen significantly, already reaching 2.7 times the total amount of major shareholders' sales during the same period, with the latter's impact on the secondary market liquidity almost negligible. As Tencent's buyback quantity significantly surpasses that of major shareholders' selling, investors' concerns have also been alleviated, and Tencent has opened up greater room for imagination for its future valuation through buybacks. II. Behind the strong cash flow, a new growth curve is emerging. Through the analysis above, it can be seen that, Whether in the market or in the minds of investors, the impact of Prosus, the major shareholder of Tencent, reducing its holdings on Tencent's stock price can now be largely ignored. In addition, some opinions believe that Tencent's future average growth rate may be around 8-10%, worrying about the lack of a new growth curve. However, looking at this year's first-quarter report, Tencent's new businesses have also performed well, indicating that there is no shortage of new growth engines in the future. In the first quarter of this year, Tencent recorded revenue of 159.5 billion RMB, with adjusted net profit of 50.265 billion RMB. Among them, advertising revenue grew by 26% year-on-year to 26.5 billion RMB, significantly exceeding the market's expected 18%. This better-than-expected growth is mainly driven by Video Number. The Video Number traffic pool continues to expand, with user time increasing by 80% year-on-year in the first quarter, doubling e-commerce transaction volume and naturally increasing merchant advertising spending. In addition to Video Number, there are also new growth curves such as Mini Programs, SaaS, and revenue growth and gross margin improvement from optimized monetization of existing games, all of which have collectively driven profit levels to new heights, further enhancing future profit expectations. In fact, US tech stocks have all experienced a transition from high growth to stable growth. During the high-growth phase, tech stocks make high investments, and high profit growth drives stock prices up. In the stable growth phase, tech companies, after deducting operating expenses, use disposable cash flow for shareholder returns. Although revenue growth is slowing down, profit quality is improving. During this phase, although the growth rate is not as fast as before, EPS is increasing year by year. For example, Apple, in the past five years, has been able to drive stock price increases through shareholder returns without very high growth rates. Since 2014, Apple has repurchased more than 4% of its total shares outstanding each year. From fiscal year 2019 to 2023, Apple's average repurchase accounted for 4.4% of total shares outstanding. Looking back over the past decade, Apple has repurchased over $600 billion, reducing its total shares outstanding by about 38%. Although it may seem that repurchasing 4-5% each year does not have a significant positive effect on stock price in the short term, over the long term, the shareholder returns generated are quite significant. Tencent can learn from Apple's successful shareholder return case. Returning to Tencent, according to Tencent's original plan to complete a 100 billion repurchase, it can reduce the share capital by about 3-3.5%. Excluding the repurchase blackout period, assuming a daily repurchase amount of 1 billion RMB in the second half of the year, Tencent can achieve a repurchase of about 130 billion HKD for the whole year, accounting for 4% of total shares outstanding. According to CICC's report, Tencent's adjusted net profit forecast for this year is 201.8 billion RMB, and it is expected to reach 229.7 billion RMB next year Assuming a buyback of HKD 130 billion, the Payout Ratio will be close to 70%, comparable to high-dividend operators, oil, and coal companies currently favored by the market. What sets Tencent apart is that, with the rapid growth of high-quality "new sprout" businesses and the dual drivers of efficiency improvement in traditional businesses, profitability is still growing rapidly. In the first quarter of this year, Tencent's gross profit, operating profit (Non-IFRS), and net profit (Non-IFRS) increased by 23%, 30%, and 54% year-on-year, respectively, consistently outperforming revenue growth. The net profit growth rate significantly exceeded market expectations, with gross profit maintaining rapid growth of over 20% for four consecutive quarters, surpassing the level of 2021. Market forecasts suggest Tencent's revenue growth of around 8-9% this year. With stock repurchases for cancellation, achieving an EPS growth rate of over 10% for the full year is not a problem, and in optimistic scenarios, it could be even higher. Driven by new businesses such as Video Accounts, Mini Programs, and SaaS, as well as the growth potential in the AI era, based on a massive traffic pool, growth points are abundant in the future. Additionally, Tencent has a total of 445.2 billion yuan in cash and deposits, and in 2023, operating net cash flow reached a historical high of 222 billion yuan, setting a new milestone for cash flow under the drive of high-quality fundamental growth, laying a solid foundation for achieving medium to long-term shareholder returns. Conclusion: After nearly two years of major shareholder reductions, Tencent's largest liquidity pressure in the secondary market has been relieved. With the moat of traditional businesses, rapid growth of new businesses such as Video Accounts, Mini Programs, and SaaS, the future looks promising. Supported by the current high buyback, Tencent may not be in its fastest growth period at the moment, but the substantial dividends provide investors with a certain safety margin. With the capital market's emphasis on cash flow aesthetics, Tencent, whose stock price has halved from its peak, is becoming increasingly certain in terms of investment certainty