Despite three years of decline, Chinese tech company Tencent is showing signs of a turnaround in 2024. The stock has seen an increase of more than 3% this year, while Hong Kong’s main Hang Seng Index has experienced a decline of over 4%. Tencent, known for its gaming and social media businesses, holds the position of the biggest stock in the index with a market capitalization exceeding $350 billion.
Analyst Projections
According to Morgan Stanley equity analyst Gary Yu and his team, the first quarter of 2024 is expected to be a turning point for Tencent’s games business. Although there may be a decrease of 4% in games growth compared to the previous year, there is optimism for an inflection point in the second quarter. Yu’s report sets an overweight rating on Tencent shares with a price target of 400 Hong Kong dollars ($51), reflecting a potential increase of over 30% from the current stock price.
Regulatory Environment
After a freeze of more than a year, Chinese authorities have resumed approvals of Tencent’s games, providing a boost to the company. Management has indicated that regulators aim to foster a healthy environment for industry growth rather than imposing constraints. This positive regulatory outlook has contributed to Tencent’s gains following the quarterly earnings report.
Tencent’s revenue streams extend beyond gaming and social media to include advertising, financial technology, and business services. Jefferies analysts have highlighted Tencent as their top pick among Asia ex-Japan internet stocks due to its diversified business models and potential for margin expansion. The company’s other major revenue generators also contribute to analysts’ optimism.
Tencent’s share buyback initiatives have been viewed favorably by analysts, with the company announcing plans to repurchase at least $13 billion in 2024. This buyback program exceeds the previous year’s efforts and is intended to yield approximately 5%. The buybacks have helped offset a sell-down by Prosus of its holdings in Tencent, with the Netherlands-based company looking to fund its own share repurchase program.
HSBC has issued a buy rating on Tencent and set a target price of 385 Hong Kong dollars. The investment firm anticipates a turnaround in Tencent’s game business, although it may not materialize until the second half of the year. While the blackout period before earnings may impact share prices in the short term, sustained growth from advertising, fintech, and business services could support earnings growth and margin improvement.
Market Trends and Opportunities
Chinese internet companies like Alibaba and JD.com have also announced share buyback programs in 2024, reflecting a shift towards more value-oriented investments. Grant Pan, CFO of China-based wealth management firm Noah Holdings, noted a changing trend in stock market behavior, where investors are focusing on the actual value of companies rather than purely valuation metrics. Low liquidity in the Hong Kong market has influenced share prices, but the appointment of a new CEO for the Hong Kong exchange could lead to improvements.
Client Interest and Investment Potential
Noah Holdings has observed increased interest from clients in investing in China, particularly as prices approach levels where opportunities for investment may arise. Pan highlighted the evolving investor behavior and the potential for value-driven investments in Chinese tech companies like Tencent, indicating a shifting landscape in the stock market.
Tencent’s positive growth outlook in 2024, driven by regulatory developments, revenue diversity, share buyback initiatives, and market trends, positions the company for potential gains in the coming year. Investors and analysts are optimistic about Tencent’s prospects and are closely monitoring the company’s performance in the evolving tech landscape.