After three straight years of decline, Chinese technology company Tencent is poised for gains in 2024. The stock is up more than 3% for the year so far, in contrast to a more than 4% decline in Hong Kong's main Hang Seng Index. Tencent, known largely for its gaming and social media businesses, is the largest stock in the index with a market capitalization of more than $350 billion. The first quarter should “represent a low point” for Tencent's gaming business, Gary Yu, an equity analyst at Morgan Stanley, and a team said in an April 14 report. “We expect gaming growth to decline by 4% YoY (versus a negative 3% YoY decline) mainly due to weak domestic growth, however, our previous expectation that Q2 will see an inflection point remains valid.” The company is overweight on Tencent shares, with a price target of HK$400 ($51). That's 30% higher than where the stock closed on Friday. Chinese authorities resumed approvals for Tencent's games in late 2022 after a freeze lasting more than a year. When asked in late March about the risks of imposing new restrictions, management said regulators made it clear they intended to “provide a healthy environment for industry growth rather than restrict the industry,” according to a FactSet transcript of the earnings call The company's other major revenue sources are advertising, fintech and business services: “Among our coverage of (Internet in Asia ex-Japan) stocks, Tencent is our top pick given its business models,” Jefferies analysts said in an April 17 note about their meetings last week with European investors. Diversification and the Margin Expansion Story.” Also helping analysts' optimism about the stock are Tencent stock buybacks. Morgan Stanley's Yu noted that Tencent announced it would buy back at least $13 billion in 2024 — more than double last year's buyback program — for a yield of about 5%. The buybacks offset the ongoing sale by Prosus of its holdings in the Chinese company to fund its stock buyback program. Prosus is a Netherlands-based company owned by Naspers, an early investor in Tencent. “Based on the current run rate of the sale of Prosus shares in the first quarter of 2024, the total buyback of Tencent shares for 2024 will be about twice that of the sale of Prosus shares,” Charlene Liu, head of Internet and gaming research for the Asia-Pacific region at HSBC, said in a report. “. On April 16th. “Tencent has increased daily repurchases to HK$1 billion per day from HK$500 million per day since mid-January,” the report said. HSBC has a Buy rating on Tencent, with a target price of HK$385. The investment firm also expects Tencent's gaming business to turn around soon, but not until the second half of this year. “While the inability to conduct buybacks during the blackout period (one month before earnings) could impact the stock price in the near term, the continued recovery in the gaming business and resilient growth from advertising, fintech and business services could help… Maintain supported earnings growth. “By improving margin,” the HSBC report said. Tencent is scheduled to publish first-quarter results on May 14. Chinese internet companies Alibaba and JD.com also announced stock buyback programs this year. “I think we're definitely seeing more mature performance or behavior patterns, if you will, especially for listed companies that are doing buybacks and making profits,” said Grant Pan, chief financial officer of China-based wealth management firm Noah Holdings. He told me in an interview on Friday. “In the past, the stock market was mostly valuation-driven,” he said. “But I think now people are actually looking not just for valuation, but for the actual value of the company. Instead of looking for multiples, they're looking for earning capacity.” Low liquidity in Hong Kong has also affected stock prices in that market, Pan said, but he hopes that will improve with a new CEO. Bonnie Chan, co-chief operating officer of the Hong Kong Stock Exchange, is set to become chief business officer in late May. Noah's clients have also begun to inquire more over the past two or three quarters about investments in China, Pan said, noting that prices are approaching a level where there may be buying opportunities. — CNBC's Michael Bloom contributed to this report.
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Analysts say Hong Kong's biggest stock is ready for a turnaround
