After plunging to a 6-year low in October 2022, Tencent Holdings Ltd (TCEHY) rallied to a 17-month high in January. However, the stock has since moved sideways as the company has fallen out of favor with Chinese investors.
According to Bloomberg data, onshore investors have sold Tencent Holding shares on a net basis for two months in a row (June-July) for the first time since 2021. Investors unloaded $375 million of Tencent shares in July through trading links between the Hong Kong, Shenzhen, and Shanghai exchanges.
Tencent Holdings, China’s most valuable company, has been weighed down by concerns about its outlook and selling by its largest shareholder. Beijing Eastern Smart Rock Asset Management said, despite the company still making money, it’s not a good time to buy Tencent Holdings, given that selling by its largest shareholder is weighing on the stock. Also, “Mainland investors all agree Tencent is cheap, but the price moves of 2022 have just proven that things can go quite extreme in the Hong Kong market.”
The upside momentum in Tencent Holdings has been hampered since June when Prosus NV, Tencent’s largest shareholder, announced that it was offloading its stake in the company. Chinese investors, who have supported Tencent holdings since it was listed in Hong Kong twenty years ago, have pulled back on their support for the stock. Since June, shares of Tencent Holdings are up by +15%, underperforming the Hang Seng Tech Index, which is up by +28%. Forsyth Barr Asia Ltd said investors may have moved out of Tencent to buy some higher beta names amid the recent risk-on sentiment in the China market.
The next test for Tencent Holdings will be its Q2 earnings report due in the middle of this month. There are signs that the company’s outlook is improving. Tencent is expected to report a +14% y/y increase in Q2 revenue due in part to solid gaming revenue growth. Analysts also remain optimistic about Tencent Holdings's prospects, as Bloomberg data shows that analysts have 70 buy ratings on the stock and just one sell rating.
Although most analysts remain upbeat on Tencent Holdings, some are cautioning that it may take time for the stock to recover. JPMorgan Chase said that while the company should deliver a “solid quarter,” it may take time for share prices to recover, given the weak sentiment. Also, Bloomberg Intelligence said, “While second-quarter numbers look to be in the bag for most Chinese Internet companies, including Tencent, we think expectations are still too high and see a risk China’s Internet companies could disappoint into the fourth quarter.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
