My Thoughts on Tencent's Valuation

 

Please click and read this disclaimer if you wish to continue with the contents below.

Tencent has just released their second quarter 2022 results. Lets revisit its sum of parts.

As at 30 Jun 2022, the fair value of its shareholdings in listed investee companies (excluding subsidiaries) was approximately RMB602 billion (USD90 billion). In terms of per share value, 90bil usd is around HK$75 per share.

During the conference call, Martin Lau the president of Tencent mentioned:

"In addition to that, we have unlisted our private investment portfolio where the book value is over USD 50 billion. And we believe there's been substantial appreciation on that over $50 billion book value. And we also look for opportunities to return capital from that private investment portfolio in the form of dividends, distributions and buybacks.

So I think if you add all of the above, the annual free cash flow in the teens billions of dollars, the listed and unlisted investments in excess of $150 billion, then you'll see that we have substantial ammunition relative to our $370 billion market cap to continue doing dividends and buybacks at an aggressive rate. In terms of what are the lessons we have learnt from the JD distributions, then I would say that we've learned how to process some of the logistics efficiently, which is good. Means we can do future such distributions or sales more rapidly. We've also developed our ability to manage relationships around those transactions and demonstrate that while we have sharply reduced our stake in JD as an example, we continue to have a very good business relationship with JD and also with Sea on an ongoing basis. And then finally, I think our investors have responded quite favorably to the dividends and distributions. And that encourages us to think about how to continue down that capital return path going forward. Thank you."

The book value of their unlisted private investment portfolio is over 50bil usd, he then continued to clarify that their listed and unlisted investments are in excess of $150bil usd. This works out to a per share value of HK$124.

HK$75 for listed and HK$49 for unlisted. He believes there is substantial appreciation of their unlisted investments, so the value will likely be much more than 50bil. We use 50bil to be conservative.

He also hinted on potential of continuing to give value back to the shareholders in the future, by unlocking these investments.

Cashflow perspective, a very clear improvement from last quarter. Substantial improvement in free cash flow due to capex reduction and slightly stronger operational cashflow. 

Both operating profit and margin have been sequentially improving for 3 straight quarters. Since their core businesses are synergistic, we can value them as one. If we annualize their 2Q2022 operating profit and base it on the last traded price, their core business on a per share value will work out to be HK$178, which is around 10x multiple(ex all listed and unlisted equity investments).

In my view, current operating profits are substantially understated due to covid lock downs, lack of domestic game version number approval this year and the overall bearish economy in china. Even so, its core is valued at only 10x earnings. See how it goes.