Tencent stock shows depth of China gloom

Published Jan 4, 2017

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Hong Kong - For a clue on how bearish foreign investors

have become about Chinese stocks, take a look at Tencent Holdings.

The Shenzhen-based technology giant has tumbled 13

percent from its September record, wiping $35 billion off the value of its

shares, as overseas funds pulled money from Hong Kong and Chinese equities. The

company’s large weighting on the Hang Seng Index - at 10 percent - helped make

Hong Kong’s benchmark stock gauge one of the world’s worst performers last

quarter.

The company, which has more buy ratings than any other in

Hong Kong, is a victim of fund redemption pressures, according to Asset

Management One Singapore. Investors pulled about $409 million from

exchange-traded funds that buy Chinese and Hong Kong stocks in the week through

Dec. 21 as concern grew over a weakening yuan and tighter liquidity.

“If there are fund redemptions, it’s hard to avoid

selling Tencent because its weighting is so big," said Toshihiko Takamoto,

a Singapore-based portfolio manager at Asset Management One.

Tencent fell 0.4 percent at the midday break. The stock

was the second-largest drag on the Hang Seng Index in the fourth quarter, after

AIA Group. The Hang Seng Index tumbled 5.6 percent in the period as China’s

currency plumbed lows not seen since 2008 against the dollar and concern about

rising money market rates spurred a record meltdown in the nation’s sovereign

debt.

Such has been the exodus that the top US ETF focusing on

China suffered the biggest outflows among emerging markets, sending total

assets to the lowest level in a decade.

US Federal Reserve officials last month increased their

projections for interest-rate increases this year, triggering a surge in the

dollar and Treasury yields. Higher US bond yields will cause outflows from

emerging markets and Hong Kong, Australia & New Zealand Banking Group has

warned.

Read also:  Tencent is now China's top company

The selloff hasn’t shaken analysts’ faith in the stock.

Tencent has 43 buy ratings, 2 neutral recommendations and zero sells, according

to analysts tracked by Bloomberg. The average 12-month target price implies a

26 percent advance over the next 12 months.

Analysts have their reasons to be optimistic. Tencent

shares have rebounded after each selloff to make new highs during its 12-year

listing, while the stock is the best performer on the Hang Seng Index in the

past five years with a 500 percent gain.

The company reported a 43 percent jump in its

third-quarter net income as its ability to attract Chinese gamers and social

media helped fuel advertising growth. Profit is expected to continue growing

for at least three more years, according to data compiled by Bloomberg.

There are signs investors are turning less bearish. The

stock gained 5.6 percent last week, its first weekly advance since late

October, and rebounding from a five-month low.

“If you focus only on its fundamentals, the stock is

still a buy," Takamoto said.

-With assistance

from Jeanny Yu, Emma Dai and Srinivasan Sivabalan.

BLOOMBERG

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