The shares of Tencent sold off hard in the last hour of trading on Friday, and expectations are that there will be considerable volatility as we open for this week. As to the reason why, everyone would have learned about a prospect of China’s regulators to clamp down on the firm’s conduct of their fintech business and investment portfolio. Should investors be surprised about the action? Certainly not. Alibaba and affiliated Ant Group have been bearing the brunt, so why should Tencent with similar practices get away with it?
To be sure, Jack Ma and his celebrity status haven’t exactly helped the Alibaba/Ant cause with the regulator. If we care to remember, it sort of culminated in Ma’s provocative Shanghai speech that triggered the cancellation of an almost-completed Ant IPO, threw the duo into turmoil, and caused considerable underperformance of Alibaba stock since. Tencent’s Ma, Pony that is, has clearly played this a lot smarter, staying away from the limelight and focussing on building out his empire.
The business model of the fintech part is similar to Ant’s, and the awakening of the watchdogs has inevitably moved Tencent into their crosshairs too. Talk is that the company will be required to establish a financial holding company to include payment, banking, and insurance services, and to be subject to a tougher regulatory environment. An impending expansion of government oversight is not just designed to regulate financial technology but to also get a grip on ever-growing mono- or oligopolies in China.
It’s not that the government’s position is acting irrationally. Beijing commissioned the buildout of a 5G broadband network across the country that costs hundreds of billions of dollars equivalent. It is certainly not designed to cater to and be exclusively used by Alibaba and Tencent, both of which have been known to fend off competitors in the making. The super-highway is meant to serve almost as a public platform to be equally made available to incumbents and start-ups.
As a smart corporate leader, Pony Ma would have pulled out all the stops to prepare for this sure thing of an onslaught. When the regulator knocks on his door, he and his troops would have simulated all possible scenarios and game plans to perfection. Even the gargantuan venture capital and investment portfolio including heavyweights such as JD.com, Meituan, Pinduoduo, Kuaishou, Didi, ZhongAn, SEA, etc could take on independent
features to divert attention, much like Alphabet’s GV, formerly Google Ventures.
Will we see a re-run of Alibaba in Tencent stock? Maybe. As with Alibaba, Tencent features most prominently in all kinds of indices, funds, and ETFs. A probable reduction in weighting will in all likelihood leave some visible scars. And once that avalanche moves, there may be nothing holding it back for a while. But equally, maybe not. Pony Ma has had the invaluable advantage of witnessing how an unprepared Alibaba/Ant group has been bludgeoned. If he isn’t prepared, who is?
Let’s see what the market does with Tencent when the opening bell rings in about an hour. Brace for volatility in the short-run, but when this is all said and done, we could have been presented with an incredible buying opportunity.
