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  • Writer's pictureIshfaaq Peerally

Tencent Stock Analysis

The market is now officially in a correction and today is still not a good day with the $SPX500 losing 2.5%. The biggest loser in our portfolio today is surprisingly Polymetal $$POLY.L , one would not expect a GOLD $GOLD miner to fall as gold prices have been rising in recent days (except today) but what happens is that algorithmic traders usually sell lots of stocks for their clients once there is a selloff and that includes mostly the risky stocks and gold miners are risky. There is also indexing. If a gold miner is part of an index and there is selling of an ETF following the index, there will be selling of the underlying assets. That should not worry us if we are thinking long-term. Short-term, it is impossible to make any predictions.

Our bond ETFs are holding well and we are still doing better than the market.

Tencent Stock Analysis

Tencent $0700.HK is the second largest company in China and ninth largest in the world. It is the Facebook $FB , the PayPal, the Nintendo of China and more. Tencent is a technology conglomerate, comparable to only Softbank. Tencent is one of the fastest growing companies on Earth and even with a market cap of nearly half a trillion dollars, it is expected to keep growing at the same fast rate in the coming years.

Tencent owns three of the four largest social networks in China, QQ, Qzone and WeChat. WeChat is the largest social network in China and is considered to be the Facebook of China but it gives its users much more options. For example, people use WeChat for payment. Charlie Munger called WeChat a serious competitor to Visa, MasterCard and American Express. Tencent's social networks do not have much competition from US companies since these are banned in China. Tencent, therefore, has a quasimonopoly although new social networks such as TikTok are emerging.

Tencent is also the largest video game developer in the world and the largest gaming company ahead of Nintendo. Tencent is entering new businesses such as AI and Cloud Computing. This is not surprising as most technology companies are entering these markets nowadays. However, it is highly competitive. They will have to compete with Alibaba $BABA and other Chinese companies.

Even if the revenues of Tencent is increasing by 30% per year, the profit margins of Tencent are going down. And that's because they are spending more and more money trying new things. They understand that social media is saturated and they cannot depend on that anymore. But Tencent has a diverse business and they can certainly make money from gaming and esport, which is the future.

The biggest risk I see with Tencent is that they have a lot of debt, especially short-term debt. US tech companies are known to have low debt and if we are going to compare Tencent with a US tech company, it doesn't look good. They don't really need the debt but they are taking it anyway. We all know of the corporate debt bubble in China. Here's an example of an overleveraged company. 20% of their free cash flow is used to repay the debts.

I don't like the valuations of the company. Compared to US companies, it is a little cheap but this is a Chinese company where the average PE ratio is 10. This company has a PE ratio of 40. There are much cheaper and better companies in China right now to invest in.

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