"The Stock King" Tencent is not short of money

Author | Huang Yu

Editor | Liu Baodan

As the long-time market value leader of Chinese internet and technology companies, Tencent's total market value has returned to HKD 4 trillion in this wave of all-round rise in Chinese assets. Although there is still a gap compared to the peak market value of over HKD 7 trillion, it has already shown the momentum of "the king returns".

From September 24th to October 7th, Tencent's stock price rose by a total of 23.4%. On October 8th, affected by the overall correction of the Hong Kong stock market, the Hang Seng Tech Index fell by 12.82%, and Tencent also fell by 8.32% along with the market, but its stock price has risen by over 50% since the beginning of this year.

In addition to being driven by the overall market rise, important factors contributing to Tencent's stock price increase this year include its billion-dollar buyback plan and the positive trend in its performance.

During the National Day holiday when many A-share investors envy the Hong Kong stock market, Tencent's buyback activities did not stop. On October 3rd, 4th, and 7th, Tencent continued to repurchase shares in the Hong Kong stock market, with repurchase amounts of HKD 251 million, HKD 137 million, and HKD 502 million respectively. The highest repurchase price on October 7th reached HKD 482 per share.

It is not difficult to notice that compared to the past daily repurchase amount of HKD 1 billion, Tencent's daily repurchase amount has decreased. Some investors have analyzed that due to exchange rules, the repurchase price in the Hong Kong stock market cannot exceed 5% of the average closing price of the past 5 trading days. Therefore, in the case of a significant short-term increase in stock price, Tencent is executing the buyback plan in a "tight spot".

However, looking at the cumulative repurchase amount, as of the close on October 7th, Tencent has repurchased over HKD 89 billion this year. At the current pace, Tencent is expected to achieve the promised billion-dollar buyback ahead of schedule this year, doubling the HKD 49 billion repurchase amount from last year.

The solid "money-making" ability is the foundation of Tencent's billion-dollar buyback. Based on the current repurchase amount of HKD 89 billion, Tencent has basically spent about 83% of its non-IFRS attributable net profit for the first half of the year.

To further boost market confidence, in addition to equity repurchases, Tencent is also continuously deepening its moat.

Recently, there have been market rumors that Tencent and the founding family of Ubisoft Entertainment, Guillemot family, are considering a joint acquisition of the French game company Ubisoft Entertainment and privatizing it to stabilize the company and enhance its value. However, this option is still in the early stages and it is uncertain whether the deal will eventually be completed.

On October 7th, Ubisoft issued a statement stating that the company is aware of recent media speculation about the company's potential interests. For the benefit of stakeholders, Ubisoft will regularly review all strategic choices and disclose them to the market at the appropriate time.

Tencent has not yet responded to this matter.

Ubisoft is a globally renowned 3A game giant, integrating game production, distribution, and sales. Its game series "Assassin's Creed" is one of the representatives of global 3A games, and other works include "Rayman" and "Prince of Persia" However, affected by poor market performance after the launch of new games, Ubisoft's stock price has been continuously declining this year. After the acquisition news came out, Ubisoft's stock price rose by 30.74% on October 4th in the Eastern United States time, but compared to the beginning of the year, its current stock price has almost halved, with a total market value of approximately 1.9 billion euros.

Ubisoft's current stock price is undoubtedly at a low point. For comparison, other top game companies such as EA have a market value of over $37 billion, and Take-Two has a market value of over $25 billion. Additionally, Forbes Asia recently reported that the valuation of Game Science, the developer of "Black Myth," has reached $1.8 billion.

It is worth mentioning that Tencent and Ubisoft have a long-standing cooperation. As early as 2018, Tencent became an important shareholder of Ubisoft through strategic investments. Subsequently, with the increasingly close cooperation between the two companies in game development and distribution, Tencent has gradually become an important force in Ubisoft's global strategic expansion.

In 2022, Tencent once again increased its stake in Ubisoft. Ubisoft's latest annual report shows that as of March 31, 2024, Tencent holds 9.986% of Ubisoft's shares, with 9.185% of net voting rights, while the Guillemot family members collectively hold 15.438% of shares and 20.455% of voting rights.

Some industry insiders believe that with the intensifying competition in the global gaming market in recent years and the increasing demand for original content, Tencent's decision to privatize Ubisoft at this time seems to be aimed at further deepening its layout in the global gaming industry.

In addition, internet industry analyst Zhang Shule expressed to Wall Street News that Tencent's strategy of acquiring high-quality game resources in the global gaming market is not news anymore. Ubisoft, as a top global game factory, not only has strong game super IPs but also has powerful research and development capabilities and a presence on multiple gaming platforms, all of which Tencent urgently needs.

Zhang Shule believes that at present, the mergers and acquisitions among global gaming giants have entered a white-hot stage, especially with the actions of Microsoft, Nintendo, and Sony stimulating Tencent. If Tencent does not make a move now, it will be too late.

Gaming is Tencent's flagship business and also the biggest hope for Tencent's international expansion, as mentioned by Pony Ma.

At the beginning of the year, Pony Ma stated at an internal Tencent annual meeting that in the past few years, Tencent has had certain advantages and built a good reputation in the development and operation of mobile games by major overseas IP game companies. Tencent hopes to horizontally deepen and solidify its software and game development, rather than confront other game companies or hardware manufacturers from a vertical perspective. The key is to find its main business and focus on it, which will lead to more success.

After a series of reorganizations and optimizations, Tencent Games reversed its decline in the second quarter of this year and reached a turning point in performance. Tencent's financial report shows that in the second quarter of this year, Tencent Games' revenue reached 48.5 billion yuan, hitting a new quarterly high, with a year-on-year growth of 9% both domestically and internationally, exceeding expectations. The proportion of international market game revenue is approximately 29%.

Clearly, Tencent still has good growth potential overseas.

DBS believes that currently, 30% of Tencent's online game revenue comes from overseas markets, and it is expected that overseas online game revenue will grow rapidly at a compound annual growth rate of 12% from 2023 to 2026. They maintain a "buy" rating on Tencent, raising the target price from HKD 537 to HKD 577 to reflect clear profit prospects and shareholder-friendly policies Morgan Stanley also pointed out that companies such as Tencent, Pinduoduo, and Ctrip are in a favorable position to leverage international opportunities, with the potential for overseas expansion to become a long-term growth driver. "Investors should pay more attention to the global prospects of Chinese internet companies, as risks related to geopolitical tensions may bring short-term volatility, but this may also create buying opportunities."

With the positive outlook for overseas growth, Tencent will continue to be seen as the "king of stocks" in the minds of investors