What happens in Shenzhen…

August 19, 2016

…could one day become Tencent.


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The Chinese internet giant is at the cusp of becoming the country’s most valuable firm. Its mighty rise has taken its valuation to $250 billion, second only to China Mobile, and well ahead of the large state-owned banks and oil companies that have dominated China’s capital markets for the better part of the past decade. The rise of a Shenzhen-based, private company at the crossroads of internet technology, social media and gaming reflects several changes under way in China.

Firstly, the private sector is clearly where investors expect the next leg of China’s growth spurt will come from. Capacity cuts in the so-called “Old China” segments of the economy are a key focus of the central government as it tries to wean local governments from their heavy reliance on fixed asset investments for growth. While skepticism about the intent of local governments to enforce capacity reductions is high there is evidence that progress is being made. The bott0m-line is that the marginal growth will come from sectors such as technology, new energy and consumption — a lot of which are dominated by private enterprises.

Secondly, the rise of Tencent captures the shifts in consumer behaviour in China. Its WeChat platform brings together social media, online shopping and mobile gaming, making it a one-stop shop for millions of people in China. In its results this week, Tencent said it was up to more 800 million monthly average users — that’s nearly thrice as much as Twitter. The question raised is whether Tencent’s social platforms are hitting a saturation point. Even if that were so, the amount of data it collects on consumer behaviour and its aggressive foray into gaming and acquisitions in other markets like India suggest there might be more juice left. After all, at roughly 32x forward earnings the stock trades close to its average P/E of 28x since listing in 2004.

Thirdly, it puts the Shenzhen-HK connect under a new light. The reaction to China finally approving the trading link between the Hong Kong and Shenzhen exchanges was decidedly lukewarm. That may have something to do with the tepid performance of the Shanghai-HK connect so far and the general apathy among global investors for China. However, the mood is slowly changing. And Shenzhen is where most of the high-risk, high reward stocks that might pique the interest of foreign investors in China are listed. Not all investors are sitting idly by. In fact, one could argue that the buyside is far better prepared this time around. At a time of sluggish hiring in London’s financial services industry two large asset managers have added Mandarin speakers to their investment teams over the past 6-12 months specifically tasked to conduct in-house research on A-share companies. Brokers have taken Shenzhen-listed companies on non-deal roadshows to packed schedules in New York and London. As a stock picker the prospect of finding the next Tencent in China is not one to ignore lightly.



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