2023: A new Dawn for Chinese / Hong Kong Stocks? A case study of Tencent

I really have to hand it to the Chinese authorities for making such a 180-degree turn in changing the market sentiments towards Chinese/Hong Kong-listed stocks.

While many are excited by the recent surge in share prices (starting from late October 2022), many long-time (bag) holders of Chinese/Hong Kong-listed stocks, with many stocks still in the red, are naturally skeptical of these large upswings.

KraneShares CSI China Internet ETF has risen approximately 95% from its low in Oct 2022.

I personally am vested in Tencent (0700.HK) stocks. In late May 2022, I divested my Alibaba (9988.HK) stocks and used the free-up capital to purchase these Tencent stocks. Technically for the amount I have invested, the investment is still in the red.

Tencent is currently the largest Chinese company by market capitalization at US$500.28 billion. Naturally many would look to Tencent as the barometer for Chinese/Hong Kong-listed stocks.

Sino-US tensions a key risk for Tencent 

Tencent Holdings’ stock has experienced wild swings in recent years, marked by record highs and multi-year lows. In comparison, its earnings exhibited more stability, despite having its own challenges.

Domestic regulatory developments and Sino-US relationship concerns have emerged as key risks for Tencent shareholders. If one is to consider price volatility as a main concern, then these would indeed be key risks. True blue value investors would have dismissed such factors; but in the world of Chinese stocks, such risks have many worried.

In January 2018, Tencent rose to a then-record high of HKD476.6 following a run of 13 consecutive months of gains.

In the months that followed, Tencent only saw one month of gains in nine as Sino-US tensions worsened following former US President Donald Trump’s commencement of a tit-for-tat trade war with Asia’s largest economy.

Tencent stock slumped nearly 50% from its January high to HKD251.4 by October 2018.

At the start of 2020, Tencent stock rebounded to HKD375. The Chinese tech giant extended its recovery as its portfolio of gaming, video streaming, and social media businesses helped the company’s earnings weather the economic downturn brought on by Covid-19-induced lockdowns. Indeed, earnings-wise, Tencent has been churning along nicely (save for the quarterly bumps which typically see the 4th quarter having lesser earnings compared to the other quarters).

While global peers underperformed in the difficult economic conditions of the Covid-19 era, Tencent stock surged to an all-time high of HKD775.6.

Beijing regulatory blitz hurts Tencent in 2021

Tencent stock went on to experience its worst periods of losses in succeeding months as China embarked on a regulatory drive in 2021.

Chinese tech stocks were hit the hardest as authorities in Beijing scrutinised a wide range of concerns including data security, gaming addiction, education expenses and antitrust issues.

Gaming stocks saw intense selloffs as state-affiliated news agencies in China described video games as “spiritual opium” and “electronic drugs”. By August 2021, Beijing authorities had placed restrictions that limited minors from playing video games to only one hour a day on weekends and holidays.

Regulators also took notice of Tencent’s dominance in the music streaming industry. The company’s music streaming unit Tencent Music was forced to give up its exclusive music rights in July 2021 as the State Administration for Market Regulation (SAMR) took matters into its hands to restore market competition.

Furthermore, the advertising industry in China saw a slowdown after tutoring firms were forced to go non-profit and were barred from listing on the stock market.

Tencent closed 2021 at about HKD456, giving a year-to-date (YTD) loss of over 18%. 

Tencent slumps to over five-year low in 2022 and the Capitulation of Chinese stocks

2022 proved to be a similar story for Tencent stock. The gaming-to-social media firm extended its losses into the year due to weakness at its core gaming and advertising businesses.

Frequent lockdowns in China due to the ongoing zero-Covid policy continued to hurt Chinese businesses throughout the year. In November, Tencent reported a back-to-back drop in quarterly revenue.

Rumors of technology investment firm, Prosus and Naspers plan to offload their stake in Tencent also caused a negative overhang on the stock.

By 28 October, Tencent slumped to HKD190.78, its lowest since January 2017. 

On 24 Oct 2022, CNBC has a post titled, “U.S.-listed Chinese stocks drop 15% after Beijing’s power reshuffle makes the market ‘uninvestable’“, read here. Reiterating what JP Morgan Chase has stated as early as March 2022. At that time JPMorgan Chase shocked investors and attracted controversy in the financial media for labeling Chinese internet companies as “uninvestable.”

China May Be ‘Uninvestable’ After All (read here)

However, on 1 November, Dutch investment group Prosus clarified the speculation and said that it had only sold “small numbers of ordinary shares in Tencent” to fund its share repurchase programme.

Prosus also reiterated its “continued confidence in Tencent’s long-term prospects”.

Tencent stock surged nearly 40% in November, following the clarification from its major shareholder. An announcement of Tencent distributing shares of food delivery company Meituan to its shareholders also propped the price.

As of 7 December’s close, Tencent stock traded at about HKD300, following YTD losses of over 33%.

The 0700 stock price was down over 61% from its all-time high of HKD775.6 hit in February 2021. The little upside from Oct 2022 to Dec 2022 provided little consolation for many long-term investors.

What is interesting in the social media world (blogosphere and Youtube etc) during this period, is that we start to see many articles/videos about the sell down in Chinese stocks or for lack of a better word – capitulation. Although the selldown itself has been ongoing for some time, and in the case of Tencent, since early 2021, the sudden and multi-year low as demonstrated in late Oct 2022, is something that has caused many investors much anguish.

Brian from 3foreverfinancialfreedom.com did a post titled “The Day of China’s Capitulation – 24 Oct 2022” on 25 Oct 2022 (read here).

Perhaps Brian has felt it is necessary to address this because there were so many who messaged him on 24 Oct 2022 about “potentially one of the most turbulent capitulation investors investing in China and HK stocks”. And in his words ” I wouldn’t have expected so many readers to follow me and suffered a capitulation when they have to sell their position yesterday to surrender but if it is, then maybe I will relook at the way how I share my positions in the future in this blog.”

Alvin from Dr Wealth wrote a post titled “Should you quit China stocks?” on 26 Oct 2022. (read here)

To quote: “Bottomline, study and invest in what you believe in otherwise you would always be in a dilemma whether to hold or sell.”

Over at the Youtube side, the Bagholder Pod was created sometime in late Nov 2022. Given the time it was created when many stocks are at their multi-years lows, the channel is perhaps aptly named (Bag Holder).

In its 2nd Episode titled “Alibaba, Tencent, SEA Ltd Earnings. Warren Buffett BUY TSMC? Double-down on Crypto Now?!”, they discussed the sell-down in Alibaba, Tencent, SEA Ltd stocks and their earnings. (watch here)

2023 A New Dawn?

Perhaps in hindsight, that period might have marked the turning point for Chinese / Hong Kong-listed stocks. If Oct 2022 marked the period of capitulation, perhaps now we might be in the stage of hope and relief?

Only time will tell.

Start of 2023 and thoughts on my portfolio (read here)

I last thought about my own stock portfolio something in early Jan 2023 whereby I was mulling whether to DCA more into growth stocks. Perhaps I have been mulling too long and given the sudden price surge (from late Oct 2022 until now – late Jan 2023), many would have felt the sense of FOMO (Fear of Missing Out).

Foreign investors rush back to Chinese stocks despite worries (read here)

The recent rally in Chinese / Hong Kong-listed stocks is not without reasons. The Hong Kong market has recently experienced one of its worst sell-down in 2022, where the Hang Seng Index slumped to less than 15,000.

As mentioned earlier, the sell-down was due to the regulatory risks on the tech giants coupled with the diplomatic tensions between the US and China. Consequently, there were spillover effects from China’s property crisis in the 3rd quarter of 2022 which further soured the sentiments in the Hong Kong markets.

However, as we end the year 2022 and start the year 2023, the narratives from China have improved.

China ended its zero Covid policy, and the Chinese banks have pledged US$162 billion in new credit to property developers. Ant Group moved key steps forward in restructuring, as its consumer finance unit won approval to expand its capital base.

Brian from 3foreverfinancialfreedom.com in his post titled, ” Jan 2023 – Portfolio Transactions & Update” dated 19 Jan 2023 (read here) has listed out his Jan 2023 portfolio. Comparing it to his Oct 2022 portfolio then, he has injected a lot of funds into Alibaba (almost double the position) and added to IShare HSTech (9000 shares). He has also added a new counter Alphabet (from 0 to 2000 shares). The value of his portfolio jumped from around S$352+k late last year (Oct 2022) during the ‘capitulation’ of Chinese stocks to around S$1.25mil on 19 Jan 23, in a duration of fewer than 3 months.

In fact, if you dig a little deeper, his bold moves started in Nov 2022, whereby the portfolio value has crossed $973K.

In short, a sense of bullishness from Brian for the start of 2023 as compared to late 2022.

With regards to the Bagholder Pod. I have not been tracking their portfolios, but I reckon Chi Keng has a fairly large proportion of his portfolio in Chinese Tech Stocks and he has witnessed large volatilities (in his portfolio values) in 2022. In their recent video titled “EP12: China Stock RALLY, 8% GST, Portfolio in 2023” and in the segment “Why People blame influencers”, there is a sense of apprehension (from them) about the harmful remarks by investors (who probably lost money in US/Chinese growth stocks in the recent down years or have blindly followed their trades). I recalled Chi Keng’s reply when asked about the recent Chinese stock rallies that his focus will probably still be on the numbers and not the price volatility (probably spoken from experience after the past years of drastic price swings).

Perhaps it is with this baggage from past volatilities, that current investors now look with hope to 2023 for Chinese/ Hong Kong-listed stocks. Likewise, I am cautiously optimistic.

If I am to describe my feeling as a retail investor currently vested in HK-listed stocks for the past few years, it would be akin to the feeling of someone who has just got off from multiple rounds of a roller coaster ride. Kind of numb (to the rhetorical headlines), and if I were to go through the rapid crashes again – would feel like puking.

I am keenly aware that the sparks can as quickly dim/disappear with any negative statements from the Chinese regulatory bodies.

No doubt the ride-up will be bumpy. Currently, according to Simply Wall Street, Tencent (0700.HK) is fully valued (if we assume the price of HKD 415); although prices seldom stay at the mean (to quote Howard Marks). Most of the time they would be in the range of overvalued or undervalued and stay there for prolonged periods.

 “Markets can stay irrational longer than you can stay solvent.” John Maynard Keynes

For me, I have stayed vested and have been doing some DCAing into Tencent stocks (little drips). Not much war chest left anyway.

Technically I have not left the ‘party’ (for some, the term ‘nightmare’ might be more appropriate). Which in a way has twisted way beyond my imagination. From the public protests in Hong Kong, culminating in the fire in Festival Walk and the slashing of policemen, students holding out from police in their university campus, implementation of the extradition law amendment bill, to the Covid lock-downs, multi-year recessions, and risk of Hong Kong dollar de-pegging from the USD, lost counts of numbers of Chinese regulatory interventions to Chinese businesses, end of zero-Covid policy, re-opening, etc…

Beyond my HK listed Tech stocks (Tencent and Pinduoduo), I have significant exposure to HK-listed dividend stocks (first bought back in late 2019) and these have rallied as well (though to a lesser extent). It has been a good start for me in 2023.

Although second-level thinking is important in investing, sometimes it is good to not overthink too much, to focus on the numbers, and think long-term.

Tencent shares extended a four-month rally after Chinese regulators granted new licenses for its games. Suggesting that Beijing may be relaxing its restrictions on the gaming industry, which included capping playing time for minors and other curbs to address gaming ‘addiction’.

Despite the rally, the numbers are still there.

Past quarters have been weak. However, Tencent has started to benefit from the adjustments that they have made to reposition itself for a new industry paradigm. They activated infeed advertisements in Video Accounts, achieved breakthroughs in international games publishing, and executed cost efficiency initiatives that re-focused them on core activities and controlled their cost growth.

In Nov 2022, during the 3Q 2022 earnings, Tencent stemmed the bleeding from the past quarters, marking its first year-on-year growth in its non-IFRS earnings after about 12 months.

Tencent’s Q3 2022 operating profit was at US$5.8 billion, up slightly from the US$5.75 billion it recorded a year earlier. This is on a non-IFRS basis, which reflects core earnings by excluding certain one-time and non-cash items.

On the same basis, profit attributable to the company’s equity holders saw a slight increase of 2% year on year to US$4.5 billion.

I shall leave you with this paragraph in the book titled, “The Most Important Thing – Uncommon Sense for the Thoughtful Investor” by Howards Mark.

Thank you for reading.


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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat. Check out my Facebook Page: https://www.facebook.com/apenquotes.tte.9?ref=bookmarks
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