When a (tech) giant sneezes

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This is not the first time that the Chinese government has been bold and seeking to harness the growing reach and power of the massive Tencent, the seventh largest company in the world by market capitalization according to the Forbes Global Rankings. .

As for the outcome of the latest attempts to impose restrictions on Tencent, as well as other big tech companies in China, only time will tell.


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But the outcome of the latest whispers in China – to limit Tencent’s growing dominance over music distribution in that country – hit share hard. The stock price fell more than 21% in just 10 days, from HKD 564 on July 16 to HKD 446 on Monday July 26.

Bloomberg noted that the decline in Tencent’s share price over the past two days had erased more than $ 100 billion from its market value.

To put this in perspective, at current exchange rates, Tencent’s loss in market value exceeds the annual budget of the South African government.

Some problems

The Chinese government has raised several questions regarding the growing influence of tech companies. The stock price rout began when regulators denied Tencent permission to acquire another music streaming company, China Music Corporation.

He noted that Tencent is already dominant in the industry, adding to previous concerns that Tencent’s growth in the music distribution industry is effectively starting to secure exclusive rights to music.

Additionally, Tencent said it is stopping all new registrations on its WeChat messaging platform due to new information security laws and regulations.

Or maybe it’s getting too big and the Chinese government is starting to feel uncomfortable.

WeChat is one of only five apps in the world with over 1 billion active users – some statistics put the number of users at 1.3 billion. Its WeChatPay payment solution has 900 million users and the value of transactions exceeded $ 1,000 billion in 2019.

The Chinese government has other tech companies in its sights as well. It tackles the fast growing and lucrative online education sector and examines the practices of online ordering and home delivery businesses, another high growth sector.

New regulations introduced over the weekend have caused prices for online education companies to drop by as much as 50%.

On the local stock market, Naspers and Prosus stock prices immediately reflected Tencent’s losses.

Read: Tencent investor Prosus collapses amid China crackdown on electronics

Naspers lost almost 16% in two days and Prosus almost 17%.

Naspers is now about 34% below its annual high and Prosus about 40% below its 53-week high.

Their heavy weighting on the JSE and, by implication, index funds means that any hiccups from Tencent are felt by SA investors.


It’s good to have a big stake in a growing company, as the management of Naspers and Prosus like to point out to investors. As long as things are going well, of course.

Things have slowed down a bit lately, as investors and fund managers around the world are increasingly concerned about the high valuations of tech companies.

As speculation on a revaluation of expensive growth stocks has increased, the numbers suggest it has happened surreptitiously at Tencent. The stock’s price-to-earnings ratio fell from over 40 times a few months ago to just under 31 times this week.

Casparus Treurnicht, portfolio manager at Gryphon Asset Management, says Gryphon has been wary of big tech stocks for some time.

“We are still not positive. Most of the changes that are rocking the counters right now are implemented permanently. In all fairness, this could just be the start of the tech collapse on a global scale.

“It will take time and there may still be little short term gains to be made. But in my opinion, the technology has crossed several limits and the chickens will come home to roost.

Treurnicht has a list of concerns that it believes may affect the high valuation of tech companies, such as increasing regional tax and revenue issues, market share, and growing concerns about the privacy of personal information around the world. .

He cautions that any stock that is already overvalued by multiple measures of value can easily be halved simply because of changes in the regulatory or regional operating environment.

“And once it’s halved, it can halve again when the numbers start to appear,” says Treurnicht.

He says the changes the Chinese government is trying to implement are akin to a stopper, and not just growth expectations: the government is actively trying to reverse some of the gains made by these huge companies.

“Naspers and Prosus [are] now only 13.3% of the All-Share index after hitting over 23% last year. We have seen very few investors who rated Naspers and Prosus as a sale last year, and we would like to see who calls it a buy right now and puts their money where they say it, ”says Treurnicht.

“Investors need to recognize the risk of any investment before investing money in it. Price is the key, ”he says, indicating that the entry price of any investment is very important.

Looking back, it’s always easy to tell when a stock or market has peaked. But, says Treurnicht, there is certainly a noticeable “price for perfection” element in the current valuation of tech stocks.

“Maybe passive investing will solve the problem for you. This increases the weight of the winners and reduces the weight of the losers.

The sharp drop in Tencent’s share price and the possible revaluation of tech stocks around the world could prove to be more of a problem for Naspers and Prosus shareholders than critics of the group’s current restructuring, the high fees paid to corporate advisers to perform stock exchange and executive compensation.


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