Tencent's stock price is expected to break through 400 HKD within the year.

Affected by the higher-than-expected US CPI data and the delayed expectation of a Fed rate cut, US stocks plummeted last night, and Hong Kong stocks collectively opened lower under pressure in early trading. The losses gradually narrowed later, and the market even briefly turned positive in the afternoon before fluctuating and declining again, but the drop was minimal. It has to be said that Hong Kong stocks have shown some resilience in the past two days.

As for the reasons, they were analyzed yesterday and won’t be repeated today. Let’s focus on how Tencent, the king of Hong Kong stocks, will perform next.

Although Tencent had already released its fiscal year 2023 results, it did not disclose the latest shareholding details of its major shareholder. On April 8, Tencent released the full version of its 2023 annual report, revealing the latest shareholding ratio of its South African major shareholder and the exact amount of shares sold over the past year.

As of the end of 2023, Tencent’s South African major shareholder held 2.367 billion shares of Tencent, a reduction of approximately 210 million shares over the year. Calculated at HKD 300 per share, the amount sold was about HKD 60 billion, and the shareholding ratio dropped from 26.93% at the end of 2022 to 24.96%.

In 2023, Tencent repurchased a total of 152 million shares, amounting to HKD 49.4 billion. Despite the selling pressure exceeding the repurchases, Tencent’s stock price still broke through HKD 400 in January 2023 before declining steadily, though it never fell below HKD 250 again.

It’s worth noting that Tencent’s South African major shareholder announced in June 2022 that it would sell 3%~5% of Tencent’s average daily trading volume every day. The news caused the stock price to plummet, even falling below HKD 200. At that time, investors panicked and sold off, thinking the sky was falling. Those who remained were the value investors or the stubborn ones who believed Tencent would eventually recover as long as it didn’t go bankrupt.

How should we view this year’s stock price?

Pessimists see that the South African major shareholder still holds about 24.5% of the shares. At the current rate of selling around 2% annually, they could continue selling for another 12 years, which would persistently weigh on the stock price. The timeline is suffocating—how many 12-year periods does one have in life? It’s too grueling.

Pessimists are correct, but optimists make money.

What I see is that in 2023, when Tencent’s repurchases couldn’t match the selling pressure, the stock price stabilized around HKD 300. This year, Tencent plans to increase repurchases to HKD 100 billion. If the South African major shareholder continues selling at the same pace, Tencent’s repurchases will directly offset the selling pressure, and the stock price could rise to HKD 400.

Tencent will release its Q1 earnings report on May 14. Starting next week, it will enter a quiet period and suspend repurchases. This is when Tencent is most vulnerable, and short sellers become rampant. When the market notices this pattern, long investors hesitate to enter, creating a self-fulfilling prophecy. The stock price might briefly fall below HKD 300, but this won’t affect Tencent’s long-term upward trend.

Optimism is built on data, not baseless claims.

Since March this year, Tencent’s daily repurchase scale has remained stable at around HKD 1 billion, showing an increase compared to before. As of April 11, the cumulative repurchase amount for the year has reached approximately HKD 21.8 billion.

Tencent plans to ramp up its repurchase program to HKD 100 billion this year. The repurchased shares are all canceled, reducing the total share count and increasing equity per share. Therefore, we can consider Tencent’s repurchases as equivalent to dividend payouts. With a current market cap of HKD 2.9 trillion, a HKD 100 billion repurchase translates to a 3.5% dividend yield.

Tencent also stated in its 2023 earnings report that it proposes a dividend of HKD 3.4 per share for the fiscal year ending December 31, 2023 (approximately HKD 32 billion). At a stock price of HKD 300, the dividend yield is 1.1%. Combined with the HKD 100 billion repurchase, the total yield reaches 4.6%, far exceeding bank deposit rates. Moreover, Tencent maintains at least 10% annual net profit growth.

Some investors might ask whether Tencent can sustain its HKD 100 billion repurchases and HKD 30+ billion dividends in the future.

Tencent’s management has demonstrated a clear commitment to supporting the stock price, initiating large-scale repurchases as soon as the South African major shareholder announced its selling plans. The management itself holds significant Tencent shares. While executives may not rely on stock sales to improve their lifestyles, many technical staff members depend on equity incentives to enhance their living standards. A decline in value would severely impact team morale.

Some investors might question whether Tencent has the financial capacity to sustain such large-scale repurchases and dividends.

Tencent’s adjusted net profit was RMB 157.7 billion, with annual growth exceeding 10%. The internet industry is currently in a contraction phase with minimal major capital expenditures. Additionally, Tencent holds RMB 400 billion in cash and cash equivalents, with the fair value of its investment portfolio at RMB 550.7 billion and the book value of unlisted investments at RMB 337.3 billion. It is fully capable of supporting long-term, large-scale repurchases and dividends.

In fact, after deducting cash and investment values, Tencent’s valuation is only 15 times earnings, which is a severe undervaluation for a super cash machine with over a billion users.

This is the foundation of my confidence that Tencent can recover through repurchases, dividends, and business growth—it just takes time.

$TENCENT(00700.HK)