The trading sentiment on the Hang Seng Index suddenly improved this afternoon, with many large-cap stocks starting to pull higher. AIA, which was previously rejected by the market due to its performance strain, experienced a low opening price of HK$52.2 and then rose rapidly to close at HK$54.2. The Hong Kong Stock Exchange also opened low and then rose rapidly, rebounding at the bottom. The Hang Seng Index closed at 16,618.32 points, up 0.88% during the day, and the index continued to rise slightly in the late session.
But one of the most noteworthy stocks today is Tencent.
Tencent's share price closed at 299.4 today, approaching the 300 mark infinitely. In the afternoon trading session, it once exceeded 300 Hong Kong dollars, and the highest transaction price was 300.6.
In terms of technical form, Tencent finally got rid of the limit of the price box of 265~295, which had been maintained for nearly 3 months, constituting an upward breakthrough.
In addition, with the resurrection of the Qingming holiday approaching, although the performance period is superimposed, late March is often the off-season for Hong Kong stock trading. Any big up or down action won't start until you come back after the holiday. However, Tencent's stock price began to rise before the holiday, which also shows that the market recognizes it and can't tolerate the bad reality that Tencent has been undervalued for a long time.
If Tencent's share price can remain around HK$300 this week, next week and after the holiday, and no longer fall back to the price box of 265~295, it is expected to further recover its losses.
A remarkable performance
Tencent's recently released 2023 results are actually very remarkable. It's just that investors in the Hong Kong stock market are generally more sad than dead, so that no one pays attention to it, and it will not be like the U.S. stock market, which soars by 10% or 20% after performance, which then triggers investors to gamble on the performance of the grand spectacle.
If Tencent's performance in 2022 is unsatisfactory, then this performance in 2023 can be said to restore the strength of the former stock king.
According to the data, Tencent's revenue in 2023 will be 609 billion yuan, an increase of 10% over the same period last year. Although 10% is not a shocking number, it is not bad for so many companies in 2023.
But more importantly, Tencent's gross profit for the whole year last year was 293.1 billion yuan, with a gross profit margin of 48%. Gross profit increased by 23% over the same period last year, while gross margin increased by 5 percentage points.
Net profit is even stronger. We know that technology companies use non-GAAP net profit under non-international standards, and Tencent's non-GAAP profit attributable to shareholders in 2023 will be 157.7 billion yuan, an increase of 36% over the same period last year.
Non-GAAP net profit increased significantly, combined with buybacks and dividends, resulting in a 38% increase in non-IFS net profit per diluted share to HK$16.32 compared to the same period last year. This is probably the highest EPS in Tencent's history.
And is this 38% increase a one-time or sustainable? Personally, I think it's more sustainable. Why?
Tencent's performance in 2022 was dragged down by the game business, resulting in the memory of the long-term depression of the stock price still in the minds of Hong Kong stock investors. The big killer against Tencent's game business is naturally the new regulations on edition numbers, that is, the wholesale number of edition numbers will be reduced by 1/10. This is beneficial to NetEase, which gathers the strength of the whole company to create high-quality games, but is not conducive to Tencent, which has a horse racing mechanism. However, in recent years, Tencent's high-quality strategy has been implemented for a period of time, and it can be clearly seen that Tencent's high-quality games have begun to increase, such as "Valorant", "Dark Zone Breakout", and "Golden Shovel Battle" in China. Overseas, it is mainly due to the contribution of the popular game VALORANT and "Goddess of Victory: Jini".
Of course, it will take time for the gaming sector to recover, but in my opinion, the advertising business is an important growth point for Tencent in 2024. The first is the empowerment of AI for accurate advertising. Tencent Hybrid has become a leading basic model, showing excellent new capabilities in mathematical derivation, logical reasoning and multiple rounds of dialogue.
Second, China's economic recovery in 2024 is becoming more and more obvious. In February, the CPI turned positive year-on-year and month-on-month, which had a significant effect on boosting market confidence. With the recovery of the economy, the scale of advertising by merchants will increase, and Tencent, as a leading Internet advertiser, will take the lead in this wave of economic recovery and advertising recovery with the help of its increasingly deep Internet ecology built through multiple ports such as Moments and video accounts.
In addition, the fintech sector is also a beneficiary sector of economic recovery. Therefore, to sum up, Tencent's performance in 2024 will further improve on the basis of 2023, which is a high probability event.
Outrageous underestimation
After looking at the performance, we can calculate the valuation.
It has been almost 3 years since Tencent fell from the top in July 2021. During this period, the valuation was lower than that of similar companies for a long time, which has disappointed and even chilled Hong Kong stock investors.
Based on the latest 2023 annual results, non-IAS diluted earnings per share were HK$16.32. Based on the current stock price of HK$299, the corresponding PE is 18.3 times. If the lowest price of HK$260 when the market overturned in January this year, the PE is only 15.9 times.
Not considering Tencent's PE that was 40~60 times high growth before 2018. This value is far from the average PE of 20~25 times that US tech giants such as Meta, Google, and Amazon, which have slowed down their growth rate.
In view of the weak liquidity structure of Hong Kong stocks, I dare not ask for 25 times PE, and the humble 20 times PE is always okay. Then the corresponding Tencent stock price should also be 320 Hong Kong dollars. Again, this doesn't take into account any YoY growth.
But in fact, Tencent's annual revenue has increased by more than 10%, and gross profit or non-IFAP net profit often grows at an annual rate of about 20%. Assuming a 15% increase in net profit in 2024 relative to 2023, the corresponding share price should be at least HK$370.
In fact, Tencent's three businesses, each of which is a giant in its own right, if it is taken to the market alone, each business is a unicorn or even a giant. Like the advertising business, at least Google and Meta, which correspond to the U.S. stock market, except that the degree of internationalization is not as good as the latter two, the valuation should actually be similar.
The fintech business should be benchmarked against Visa, MasterCard, or Buffett's favorite American Express, and such companies are even valued at higher valuations in the U.S. stock market than Meta and Google, enjoying 30 times PE for a long time.
Of course, I don't mean to say that Tencent will raise its valuation if it splits up. Tencent has also said it has never considered a spin-off. I quote these just to support Tencent's current undervalued state.
It is necessary to add that Tencent's undervaluation is not the inevitable result of the reduction of Naspers holdings in South Africa. The Naspers reduction was announced in March 2018, but Tencent's all-time high of HK$775 was reached in February 2021. Naspers' reduction in holdings is not an inevitable logic of Tencent's valuation being suppressed.
HSI comes to the crossroads
I mentioned in my article half a month ago "Multi-sector Collective Breakthrough, Hang Seng Index Transaction Hit a New High, Spring of Hong Kong Stocks is Coming" that the Hang Seng Index has shown positive changes since March, the first is that the index once again stood above the 20-week price moving average after a year. The second is that the Hang Seng Index stands at the 100-day moving average (MA100). And I mentioned in my article at the time that if these breakout signals can be maintained for a while, they will hopefully evolve into true breakouts.
Judging from today's situation, the start of Tencent's stock price is undoubtedly a shot in the arm. Because in the past half month, AIA's performance on the street led to a downward eruption of stock prices, and the high-dividend stocks in the first Chinese word have a high-altitude flame-out trend, which inevitably makes people worry that the breakthrough at that time will be like countless times before, it is a fake breakthrough, and finally it will return to its original shape.
So today's wave of rise, the significance of the Hang Seng Index is equivalent to another low-altitude relay. If Tencent and some technology stocks can take over the baton next, for example, Baidu rose 4% yesterday due to Apple's outsourcing of the mobile phone AI system of the National Bank, and continues to rise 4% today, then the Hang Seng Index is expected to further stabilize the 20-week moving average. Then with the beginning of the first quarter performance period in mid-to-late April, it will be further supported.
Of course, the near future is undoubtedly a sensitive period, which can be up or down. We have also seen that the Hang Seng Index seems to lack direction for several weeks, and it seems that neither the long nor the short side can find an obvious basis and excuse, and do not dare to take large-scale action.
But the good factor is that it can at least be maintained around 16,500, and it is not like last year's end of "no wind and three feet of waves, and the opening is the peak".