Tencent Holdings Limited (SEHK:0700): What You Need to Know Before You Invest (Guest Post)

Tencent Holdings Limited (SEHK:0700): What You Need to Know Before You Invest (Guest Post)

Since my initial post where I shared about how one can go about buying/selling in the Hong Kong Stock Exchange (you can read the post here in case you’ve missed it), there are a couple of readers who asked me on the companies I am looking at.

Tencent eyes new apps to fend off rivals and offset slower growth ...This post was originally posted here. The writer, Lim Jun Yuan is a veteran community member and blogger on InvestingNote, with username known as ljunyuan and has 1176  followers.

Today, I’d like to share with you all the researches I’ve done about the Hong Kong-listed company Tencent Holdings Limited (SEHK:0700), and I hope you’ll gain a better understanding about the company at the end of it:

About Tencent Holdings Limited:

    • An Internet services company established in Shenzhen, Guangdong Province in China in 1998
    • Today, Tencent Holdings Limited forms the trio of “BAT” in China – B for Baidu, A for Alibaba, and T for Tencent.
    • You may be familiar with some of the names below (all of which are the companies’ consumer businesses):
        • WeChat (微信), a multi-purpose messaging, social media, and mobile payment app – first released in 2011, and by 2018, it became one of the world’s largest standalone mobile apps. It is described as one of China’s “super apps” because of its wide range of functions made available to its users.
        • Tencent QQ, which offers online social games, music, shopping, microblogging, etc.
        • 腾讯视频, or Tencent Video, a Chinese video streaming website.
        • If you are a hardcore gamer, then the following names should be immediately recognisable to you – League of Legends (by Riot Games, which is owned by Tencent Games), along with Fortnite (by Epic Games), Assassin’s Creed (by Ubisoft), and Call of Duty (by Actvision Blizzard) – where Tencent has a stake in the 3 companies (Epic Games, Ubisoft, and Actvision Blizzard.)
    • Apart from that, the company also provides fintech and cloud services, along with online advertising services for enterprises.
    • From the company’s website, I note that its credit ratings were as follows (accurate at the time of writing): A+ with a stable outlook by S&P, A1 with a stable outlook by Moody’s, and A+ with a stable rating by Fitch Ratings.

Historical Performance of the Company:

In this section, you will find some of the key performances of the company over a 5-year period (between FY2015 and FY2019 – the company have a financial year-end on 31 December):

Revenue, and Net Profit Attributable to Shareholders:

FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
Total
Revenue
(RMB’mil)
RMB
102,863m
RMB
151,938m
RMB
237,760m
RMB
312,694m
RMB
377,289m
Net Profit
Attributable
to Shareholders
(RMB’mil)
RMB
28,806m
RMB
41,095m
RM
71,510m
RMB
78,719m
RMB
93,310m

As you can see from the table and line chart above, both the company’s top- and bottom-line have recorded improvements every single year for the past 5 years:

    • Revenue have recorded a compound annual growth rate (CAGR) of 29.7% – where it has gone up from RMB102,863m in FY2015 to RMB377,289m in FY2019.
    • Net profit attributable to shareholders improved at a CAGR of 26.5% – where it increased from RMB28,806m in FY2015 and RMB93,310m in FY2019.

Gross and Net Profit Margin, and Return on Equity:

FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
Gross Profit
Margin (%)
59.5% 55.6% 49.2% 45.5% 44.4%
Net Profit
Margin (%)
28.0% 27.0% 30.0% 25.2% 24.7%
Return on
Equity (%)
24.0% 23.5% 27.9% 24.3% 21.6%

Looking at the years between FY2017 and FY2019, all three of them (gross profit margin, net profit margin, and return on equity) have gone on a downward slide.

My personal opinion for this is because of the competitiveness in technology companies, and this can compress the company’s margins.

Current Ratio:

Does the company have sufficient liquidity to meet its short-term (those within a year) obligations? The way to find out is through what is called the “current ratio”, which can be calculated by dividing the company’s current assets by its current liabilities – and a value under 1.0 means the company may have problems meeting its short-term obligations (not ideal.)

With that, let us take a look at Tencent’s current ratio over the years:

FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
Current Ratio
(%)
1.2 1.5 1.2 1.1 1.1

 

Over the past 5 years, Tencent have been maintaining its current ratio at around the range of 1.1 to 1.2.

Net Cash or Net Debt?

FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
Cash and Cash
Equivalents
as at the End
of Period (31 Dec)
(RMB’mil)
RMB
43,438m
RMB
71,902m
RMB
105,697m
RMB
97,814m
RMB
132,991m
Total Borrowings
(RMB’mil)
RMB
24,551m
RMB
106,031m
RMB
131,905m
RMB
179,289m
RMB
252,520m
Net Cash/Debt
(RMB’mil)
+RMB
19,087m
-RMB
34,129m
-RMB
26,208m
-RMB
81,475m
-RMB
99,529m

 

Over the past 5 years I have looked at, Tencent’s total borrowings have seen an increase every single year. With that, the company have sank deeper into a net debt position with every passing year.

Tencent’s Dividend Payouts to Shareholders over the Past 5 Years:

Tencent declares a dividend payout to shareholders on an annual basis (meaning one payout a year), with an ex-dividend date around mid-May.

The following is the company’s dividend payout to shareholders over the years, along with its dividend payout ratio:

FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
Dividend
Per Share
(HKD)
HKD
0.47
HKD
0.61
HKD
0.88
HKD
1.00
HKD
1.20
Dividend
Payout
Ratio

(%)
13% 13% 10% 11% 11%

Looking at its dividend per share payout to shareholders over the past 5 years, it has gone up from HKD0.47 in FY2015 to HKD1.20 in FY2019, a CAGR of 20.6%. Also, its dividend payout have also gone up every single year.

However, its low payout ratio suggests that the company have retained a huge portion of its earnings for future growth.

Is Tencent’s Current Share Price Considered Cheap/Expensive?

One of the ways I find out whether or not a company is considered cheap or expensive is by looking at its current valuation (based on its current share price), and compare this with the historical average (which I compute at the backend.)

At the time of writing, Tencent’s share price is trading at HKD440.60. As such, its current valuations is as follows:

 

P/E ratio: 39.4
P/B ratio: 8.3
Dividend Yield: 0.3% (computed based on the company’s dividend payout of HKD1.20/share in FY2019)

The company’s 5-year historical average valuations (which I have computed) is as follows:

P/E ratio: 38.4
P/B ratio: 9.5
Yield: 0.3%

 

Looking at its current valuations, and comparing against its 5-year average, at its current share price, Tencent is considered to be neither trading at a discount nor at a premium – due to its slightly lower current P/B ratio, and a slightly higher current P/E ratio.

 

Conclusion:

The writeup is by no means a recommendation to invest or divest in Tencent Holdings Limited. It is just a sharing for you to learn more about the company.

Some of the pluses include its growing top- and bottom-lines over the years (with CAGR of more than 20%), along with a growing dividend payout to shareholders (even though when converted to SGD, it is not much, but it is something.)

On the other hand, the company’s gross and net profit margins have declined over the years, and also, the company have sank deeper into a net debt position over the years (due to its borrowings increasing over the years.)

 

Disclaimer: At the time of writing, I am not a shareholder of Tencent Holdings Limited.

Once again, this article is a guest post and was originally posted on ljunyuans profile on InvestingNote. 

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