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When a (tech) giant sneezes

Tencent tumbles, Naspers and Prosus follow.
Intimidatingly dominant: WeChat is one of only five applications in the world that has more than 1bn active users. Image: Bobby Yip/Reuters

It is not the first time the Chinese government has flexed its muscles and looked at reining in the growing reach and power of the huge Tencent, the seventh biggest company by market capitalisation in the world according to the Forbes global ranking.

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

But the result of the latest murmurings in China – to limit Tencent’s growing domination of music distribution in that country – has hit the share hard. The share price fell by more than 21% in just 10 days, from HKD564 on July 16 to HKD446 on Monday (July 26).

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

To put that into perspective, at current exchange rates the loss of market value in Tencent exceeds the SA government’s annual budget.

A few issues

The Chinese government raised several issues with regards to the growing influence of technology companies. The rout in the share price started when regulators refused permission for Tencent to acquire another music streaming company, China Music Corporation.

It noted that Tencent is already dominant in the sector, adding to previous concerns that Tencent’s growth in the music distribution industry is having the effect of it effectively starting to gain sole rights to music.

In addition, Tencent has said that it is stopping all new registrations to its WeChat messaging platform due to new laws and regulations concerning security of information.

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

WeChat is one of only five applications in the world that has more than 1 billion active users – some statistics put the number of users as high as 1.3 billion. Its WeChatPay payments solution has 900 million users and the value of transactions exceeded $1 trillion back in 2019.

The Chinese government also has other technology firms in its sights. It’s cracking down on the fast-growing and lucrative online education industry, and is looking into the practices of online ordering and home delivering businesses, another high-growth industry.

New regulations touted at the weekend saw the prices of online education companies falling by as much as 50%.

On the local stock market the share prices of Naspers and Prosus mirrored the losses in Tencent immediately.

Read: Tencent investor Prosus slumps amid China’s ed-tech crackdown

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

Naspers is now some 34% lower than its annual high and Prosus around 40% lower than its 53-week high.

Their big weighting on the JSE and, by implication, in index tracker funds, means that any Tencent hiccup is felt by SA investors.

Rerating

It’s nice to have a big stake in such a growing company, as Naspers and Prosus management like to point out to investors. As long as things go well, that is.

Things have been slowing down a bit lately as investors and fund managers worldwide are getting more concerned about the high valuations of tech companies.

While speculation of a rerating of expensive growth stocks has been increasing, figures suggest that it has been happening surreptitiously at Tencent. The share’s price-earnings ratio has decreased from more than 40 times a few months ago to just less than 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 shaking the counters at the moment are being implemented on a permanent basis. In all honesty, this might just be the start for tech to crumble globally.

“It will take time and there might still be small, short-term gains to be made. But in my opinion, tech has overstepped several boundaries and the chickens will be coming home to roost.”

Treurnicht has a list of concerns that he believes can affect the high valuation of technology companies, such as increasing tax and regional revenue issues, market share, and growing concerns regarding privacy of personal information worldwide.

He warns that any share that is already overvalued according to several value measurements can easily halve just from changes in the regulatory or regional operating environment.

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

He says the changes the Chinese government is trying to implement are akin to putting up a stop sign, and not just on growth expectations: the government is actively trying to reverse some of the gains these huge companies have made.

“Naspers and Prosus [are] now only 13.3% of the All-Share Index after reaching more than 23% last year. We saw very few investors that rated Naspers and Prosus as a sell last year, and we would like to see who is calling it a buy at the moment, and putting their money where their mouth is,” says Treurnicht.

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

In hindsight it’s always easy to say when a share, or a market, has peaked. But, says Treurnicht, there is definitely an element of “priced for perfection” noticeable in the current valuation of tech stocks.

“Maybe passive investing will take care of the problem for you. It increases the weights of winners and reduces the weighting of the losers.”

The sharp decline in Tencent’s share price and the possible rerating of tech stocks worldwide might turn out to be more of an issue for Naspers and Prosus shareholders than the criticism of the current restructuring of the group, the high fees paid to corporate advisors to effect the share swap, and executive remuneration.

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The Chinese authorities are stepping in to protect the stability of the global banking system. The leverage by the Chinese private sector is 180% of GDP, bringing total national Debt/GDP to 280%.

China is a member of the IMF. The IMF has issued warnings about the risks posed by the Chinese shadow banking system. This growing debt in the shadow banking system is not controlled and managed by the People’s Bank of China, their Central Bank. The American authorities have also warned about the risks to the international financial system. The Central Bank can only provide liquidity to the formal banking system in case of a financial crisis. The shadow banking system is so big that it can cause uncontrollable damage to the international financial system when, not if, this credit bubble bursts.

The Chinese authorities did not act without prior warning. They have issued clear warnings, in typical opaque Central Banker language, more than a year ago. They are not acting against the size of tech companies per se. They are acting to reign in the shadow banking system and the excessive leverage in the system. They are acting in defence of the entire global financial system.

What all of this boils down to is this: When a rising proportion of Tencent’s shadow banking clients default on their debt, the financial shocks will spread to South Africa where the average citizen won’t be able to access his bank account. No money at the ATM, the credit card won’t work at the cashier, bank savings will disappear and the economy will crash. Those who think this description is a bit far-fetched, haven’t read “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson, the former Treasury Secretary of the USA.

https://www.ft.com/content/04a0a603-9f08-419b-a54f-1cfb0922acc8

https://www.bis.org/publ/work701.pdf

https://www.bloomberg.com/news/articles/2021-01-27/china-s-crackdown-will-shake-up-world-s-largest-fintech-market

You are well read sir! Thanks for this

Wow….when you put it like that……
Who would have thought the Chinese could be the world’s knight in shining amour! Right at the same time the world is suffering under this pandemic! Go figure!!!!
If it seems too good to be true etc etc etc!

China stands alone in opposing the ambitions of the Rothschild’s inspired “New World Order”, being totalitarian control of the entire planet by the beneficiaries of the ongoing stealth-wealth transfer to the few from the rest. There is no doubt that they would much prefer to take those reigns. We are all fodder to the all-consuming power-transfer machine whatever happens from here on. My popcorn business should prosper, until it also pops.

From a historical perspective this scenario has been played out in regimes like Stalin’s Russia, Hitler’s Germany and to a lesser degree some dictatorially run South American countries. Putin is now testing the water.

Inevitably, the end result is war. Taiwan will be bracing itself and so should all the Western IT giants like Google, Amazon and Apple as cyber warfare is as destructive but not as costly as the real thing.

I told Simon that his bullish stance on Naspers and Prosus was going to flop.

End of comments.

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