Tencent’s Record Buybacks Are Not Enough to End $43 Billion Rout

(Bloomberg) -- Tencent Holdings Ltd. has returned about $24 billion to shareholders via buybacks and dividends this year. But even that won’t convince investors that it’s due for a turnaround following a $42 billion market value wipeout.

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Shares of the Chinese gaming company have fallen more than 27% since its January high, trailing the Hang Seng Tech Index despite it buying back more shares than any other firm in Hong Kong this year. Investors remain cautious that broad global selling of Chinese assets and a sputtering economy will remain key pressure points.

“That the stock has underperformed is really emblematic of the investor disillusionment with China,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “Tencent stock can start outperforming only when investor confidence in China returns.”

In total, Tencent has spent $4 billion in buybacks and another $20 billion across cash dividends and distributed shares in food-delivery firm Meituan, according to Bloomberg calculations.

Shares of the company gained as much as 1.1% on Tuesday as Apple Inc.’s Tim Cook showed up at a Tencent gaming tournament in China, endorsing one of the biggest earners on the app store. It ended the Hong Kong session up 0.3%.

There are clear reasons why investors are concerned. Tencent’s fintech and business services segment, which accounts for about one-third of total revenue, likely grew at a slower pace last quarter as offline payment volumes were hit by slower retail sales, according to HSBC Holdings Plc’s Charlene Liu. The bank also trimmed its 2023 games revenue growth forecast given contribution from new launches may take longer to ramp up.

Still, optimism is slowly building among some analysts as Tencent shifts its business mix toward higher-margin segments such as mini-games and video accounts, while reducing exposure to its less profitable video-streaming business. The recent boost in share buybacks may also provide some price support even as its biggest shareholder trims its stake, according to Morgan Stanley.

Tencent’s forward earnings forecast is at a historic high and the company’s shares remain the most recommended in Asia. The stock has 67 buy recommendations and zero sell ratings, according to data compiled by Bloomberg.

Even so, the analysts’ bullishness is being overshadowed by broader macro concerns and rising global yields. A subdued domestic inflation print released Friday and the lackluster data on spending during the Golden Week holiday suggests the turning point is still far away.

“Fund flows remain unfavorable toward China, which will continue to affect Tencent’s ability to outperform as a high-beta name,” Paul Pong, managing director at Pegasus Fund Managers Ltd. “The inflection point for the company will appear when the US yield stops rising and China’s economy bottoms out.”

Tech Chart of the Day

The Nasdaq 100’s rally paused in late summer, but its valuation has slipped more sharply since its July high. The tech-heavy gauge now trades at about 23 times forward earnings compared to about 27 at its peak this year, as earnings estimates steadily rise.

Top Tech Stories

• Microsoft Corp.’s LinkedIn is cutting about 668 roles across its engineering, product, talent and finance teams. These are the second such cuts this year as fewer companies use the hiring platform and corporate social network.

• Alibaba Group Holding Ltd. and Tencent have joined a $300 million financing for Baichuan, one of scores of Chinese AI startups hoping to capitalize on a surge of interest in developing ChatGPT-like services.

• Google’s exclusive deals to be the default search engine on mobile devices and PC browsers block rivals from as much as half of all queries conducted in the US, the Justice Department’s economic expert said at the company’s antitrust trial Monday.

• Apple Inc.’s new iPhone 15 is selling far worse in China than its predecessor, according to separate analyses, reflecting stubbornly weak consumption as well as the rise of rivals like Huawei Technologies Co.

• Taiwan Semiconductor Manufacturing Co. has dropped plans to build an advanced chip plant in the island’s north, a pullback that comes after reports of growing local opposition to the move.

Earnings Due Tuesday

• No major earnings expected

--With assistance from Julie Chien, Hua Bu, Subrat Patnaik, Michael Msika, David Watkins and Rheaa Rao.

(Updates to add stock move in paragraph five.)

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