After a struggling for a good couple of months, Naspers absolutely crushed it on Thursday. The only reason for that was its 34.5% holding in Chinese internet giant TenCent. This is no Candy Crush, this is a Tencent earnings crush, absolutely blowing expectations out of the water. The thing is, because the business is growing so quickly, earnings need to keep pace. No, let me rephrase that, earnings need to beat expectations, because the market has priced in aggressive growth.
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One earnings stumble and the pain is going to be too much to bear. Numbers came in for the Chinese internet giant post the market there, in fact long after the market had closed. I had waited for these results from earlier in the morning — the Hong Kong market closing bell rings exactly at the same time that the opening bell rings in South Africa, so there are (other than the auction process) no overlaps.
The trickiest part for many ordinary people, as well as the average Joe investor is trying to understand what it is exactly that Tencent does. If the company was a person, they would still be at school and be in that awkward phase, you know what I mean. The listing itself is nearly 10 years old (in fact it will turn 10 in a month and a day from the date of publication).
The company’s website describes it as follows:
Tencent is providing value-added Internet, mobile and telecom services and online advertising under the strategic goal of providing users with “one-stop online lifestyle services”.
That doesn’t quite cover it though, because it’s involved in instant messaging, online gaming, news, ecommerce and entertainment of all sorts. And as the company profile points out, half of the staff are involved in R&D, because technology advances quickly (thanks Gordon Moore -> Moore’s Law), the seven year old Tencent Research Institute will no doubt produce many quality ideas amongst quality graduates.
So TenCent is trying to be a one stop shop for all their users, of which there are many. Its main business, out of th three different arms, inside of the big daddy Value Added Services is its online gaming platform, which generated 10.387 billion Renminbi, or at current rates US$1.67-billion. Wow. That’s a fairly substantial portion out of a total of 18.4 billion Renminbi (US$2.96-billion) for the first quarter to end March.
The increase over the prior quarter is simply astonishing: 36% higher when compared to Q1 2013, but profits were 60% higher year on year, just over US$1-billion(US$1.050-billion to be exact). Basic EPS was 3.5 Renminbi, which translates to 4.36 Hong Kong Dollars (HKD) per share, that is for the quarter. Why Hong Kong Dollars all of a sudden? Well, the company is listed there, in Hong Kong.
The previous close was 513.5 HKD. Annualise (you shouldn’t, if the company is growing that quickly) the quarterly earnings and the stock is suddenly trading on 29.5 times. That is hardly a bargain, but the earnings expectations are going to have to be ramped up.
If earnings grow by 50% a year, then it may be quite acceptable to pay 30 times earnings. The PE unwind is simply astonishing. In order to maintain these lofty rates though, Tencent will continue to have to grow its other businesses aggressively.
Both its advertising and ecommerce businesses were disappointing in the prior quarter, when compared to the previous one. Seasonality, Chinese New Year puts a spanner in the works.
The Chinese ecommerce market has been elevated to prominence recently. In China, adoption of the mobile devices over fixed internet (PCs) has basically meant that people have skipped PCs in pretty much the same way that Africa has skipped fixed lines.
To conclude however, Tencent is again demonstrating why it is highly rated, because delivery is ahead of expectations and innovation is a top priority. A stock split is happening, as of today, the new code is 2988, which is a pity, I loved 0700 so much! It was so James Bond.
I guess the next big piece of news flow for it, and more broadly, internet stocks, is the Alibaba listing, set to take place in the next 50 days or so. While neither TenCent nor Naspers are cheap (the one’s “cheapness” is a function of the other), the fact of the matter is that their businesses are growing. Growing fast. But they need to, in order to grow into that multiple.
This article by Sasha Naryshkyine is adapted from the Vestact newsletter and republished with permission.
