Tencent Holding (OTC: TCEHY), a sprawling conglomerate can rightly be called China’s Berkshire Hathaway Inc. due to the numerous diverse businesses under its fold, so many wonder how to buy Tencent stock.
Tencent currently ranks eighth among global companies in terms of market capitalization. It would have ranked even higher if not for an earnings-induced sell-off in mid-August, when it reported its first profit drop in 13 years.
The Hong Kong-based company, which also has an OTC listing, is a technology and Internet services powerhouse with a presence in social media, gaming, and advertising, among others. Despite the regulatory concerns that recently drove Tencent’s shares lower, analysts are bullish on this sizzling Chinese Internet firm, which is also called China’s Facebook due to its flagship product WeChat.
Tencent, an investment holding company based out of Shenzhen, China, was founded in the year 1998 by Ma Huateng, known as Pony Ma, and four of his friends. The company has several firsts to its credit: it’s the first Chinese internet company to be profitable and the first Asian company to exceed $500 billion in market cap.
Initially set up as a software company, the company launched the QQ instant messaging app for the eastern market in 1998. With the release of QQ 2000, the company forayed into e-commerce. After posting losses for three consecutive years, Tencent broke even in June 2001.
In 2003, the company launched Tencent Messenger as well as Real Time Xchange, an enterprise instant messaging service. Tencent also entered into the MMORPG (Massively multiplayer online role-playing game) gaming space.
Tencent went public in June 2004 by listing its shares on the Hong Kong Stock Exchange, and in the same year, it launched QQ2004 with several improved features and utilities. The shares were priced at HK $3.70, equivalent to $0.47 at that time, with the offering raising HK $1.55 billion. This represents a gain of over 9,000 until Sept. 5, 2018.
The year 2005 saw the introduction of several products, including a C2C auction platform called PaiPai.com, an escrow online payment platform called TenPay, a social networking platform called QZone and QQFantasy, the first in-house MMORPG development.
In 2007, it became the number one portal in China. The company launched QQ2009 as well as Xiaoyou social media platform in 2009. 2011 saw the introduction of Weixin mobile messaging app in China and the Buy.qq.com, a B2B2C platform.
Weixin was launched as WeChat internationally in 2012, while the company also launched Weixin Moments, which possessed social networking functionality, and Tencent Weiyun, a cloud storage. Subsequently, the company launched several new products and features, including Weixin Wallet mobile wallet, the addition of DIDI Chuxing taxi-booking facility to Weixin and several financial services options.
Tencent owns hundreds of subsidiaries and associate firms operating in a wide range of businesses such as:
- Video gaming
- Real estate
- Virtual reality
3 reasons to buy Tencent
Exposure to rapidly expanding Chinese economy
Tencent is many businesses rolled into one and is poised to benefit from the growing Chinese consumerism. The opportunity is evident from Tencent stellar’s revenue growth over the years.
Tencent has a sound balance sheet. Free cash flow at the end of the period stood at 15374 million Chinese yuan (or about $2.25 billion).
Recent weakness as a buying opportunity
From the year-to-date’s closing high of HK $473.584 (Jan. 23), the stock has lost about 28.5 percent (Sep. 4). The stock began to experience downward momentum in late March because of some insider stake sales, including those by South African media conglomerate Naspers, one of its early backers.
How to buy Tencent
You can buy the stock directly or invest in funds that have exposure to the stock. There are three methods. OTC-traded shares of Tencent can be purchased from the domestic market, the original Hong Kong-listed shares can be bought through a broker, or you can opt for electronic funds transfers (ETFs).
1. Buy OTC-traded Tencent stock
You’ll need an account with a full-service or discount brokerage. Since OTC-traded shares are unlisted, purchases have to be routed through market makers who possess an inventory of securities. Once you place an order with your broker, it will then get in touch with the security’s market maker. The market maker quotes his ask price and it’s then matched with the bid price.
The bid-ask-quote is available through the over-the-counter bulletin board or OTCBB. If the order placed is a market order, the broker has to accept the ask price. Once the broker transfers money to the market maker’s account, the latter will transfer the security to the broker’s account. Alternatively, the order placed can be a limit or a stop order.
2. Buy Hong Kong-listed Tencent shares
If you want to invest in Hong Kong-listed Tencent shares, look out for a broker that offers international share trading. It’s prudent to know upfront how much cost is involved in the transaction. There are other issues to contend with, such as capital controls imposed by governments to put a limit to the amount invested by a foreigner, differential tax treatments for domestic and foreign investors, etc.
Additionally, currency risk comes into the picture. As currencies fluctuate, an investor may at times lose out on the profits made on the stock due to the fluctuations in the currency.
3. Gaining exposure through funds/ETFs
One safe way is to invest in mutual funds or ETFs that have Tencent as one of their holdings. Here are some of them along with Tencent’s weighting in each of them given in parentheses:
- iShares FTSE/Xinhua China 25 Index (ETF)(NYSEARCA: FXI) ( 7.97%)
- iShares MSCI China Index Fund (NASDAQ: MCHI) (15.11%)
- KRANESHARES TR/CSI CHINA INTERNET (NYSEARCA: KWEB) (8.78%)
- SPDR S&P China (ETF) (NYSEARCA: GXC) (13.9%)
Outlook For Tencent shares
The fundamental outlook for Tencent is definitely rosy. The WeChat social networking, which has over 1 billion users, is only in the early stages of monetization, while Tencent has also made inroads into some fast-growing areas such as video, cloud computing, artificial intelligence, etc.
Therefore, the going is likely to get only better. However, investors may have to be wary of geopolitical headwinds such as the regulatory clampdown on online gaming by China as well as President Trump’s obsession with trade tariffs which threatens a trade war between the U.S. and China. The current depressed valuation tilts the scales markedly in favor of buying the stock.
Given Tencent’s superior revenue growth rate, financial muscle and diverse portfolio that can mitigate the impact of any potential downturn, you may find it a great opportunity. Investing in this behemoth comes with some near-term risks such as the Sino-U.S. trade-tiff and near-term margin erosion that comes with increased investment.
Unfortunately, this stock has not gained much visibility among U.S. investors because of its listing in Hong Kong.