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Tencent once again faced shareholding reduction from major shareholders, but the logic for the recovery of stock prices in the Chinese internet sector remains unchanged.

When major shareholders start to sell, it is usually a signal. Internet giant Prosus and its parent company Naspers decided on Monday to reduce their holdings in Chinese internet company Tencent Holdings (0700.HK), as well as their earlier decision to sell JD.com (JD.US) shares, sparking discussions in the market on whether long-term internet investors are reevaluating the prospects of the Chinese internet industry.$TENCENT (00700.HK)$$JD.com (JD.US)$

So far, the major shareholders' reduction in holdings seems to be a case of 'It's my business, not yours'. Some analysts believe that Prosus and Naspers are trying to minimize the impact on Tencent while mitigating their own operational pressures as much as possible.

After 2018 and 2021, this is the third time tencent has been reduced by Prosus and Naspers. This reduction also means that tencent's major shareholder has broken its promise not to sell before 2024.

Image source from the internet

Is the sell-off because they feel they are too cheap?

Currently, Prosus owns about 28% of tencent. Analysts believe that this is its measure to provide funds for repurchases by selling some of its tencent stocks to make up for the discount of the company's transactions relative to its net asset value. The announcement stated that the repurchase funds will be obtained through the orderly and small-scale sale of tencent stocks by Naspers, that is, "selling tencent to buy themselves".

The company stated that the amount of this sale only accounts for a small part of tencent's average daily trading volume, reaffirming their confidence in tencent's long-term value. Naspers also disclosed that it sold JD.com stocks obtained as special dividends from tencent.

Marco Spinar, portfolio manager of the emerging markets stock team at Neuberger Berman, an international asset management company, said, "Naspers is addressing its long-standing and approximately 50% discount issue compared to tencent's transaction price."

Part of the reason for the significant discount of Naspers' stock price is that the group owns Russian assets - the internet company VK and Avito, its classified advertising business being sold. Both generate significant cash flow, resulting in significant impact, especially when the market does not view the losses on internet companies in its investment portfolio in the best light.

Fidelity Investments' senior analyst for emerging market stock strategy, Ola El-Shawarby, stated that the significant previous drop in Chinese internet stocks, including Tencent, did not help the shareholders, and the company did not make efforts to reduce the substantial discount between its trading price and its net asset value. Shawarby added that the company decided to make its stock sales more structural and pay attention to the impact on Tencent stock, which is a positive factor for Prosus and Naspers.

According to media reports, Naspers and Prosus have long been 'frustrated' by the fact that their Tencent shareholding, has been worth more than their entire company, as reported by Bloomberg. The recent divestment is their latest attempt to narrow this discount. In their statement, they mentioned that this gap has become unacceptable.

Shawarby stated that it is currently unclear how many Tencent shares this conglomerate intends to divest and how much of a discount it desires to reduce. However, she does not see this as a sign that the conglomerate is dissatisfied with Chinese internet stocks. Spinner also downplayed the possibility of any such signals, pointing out that the company reiterated its view of Tencent as a core holding with promising prospects.

On June 27, Tencent's Hong Kong-listed stock price fell by 1.6% to 378.20 Hong Kong dollars, while Prosus' share price increased by 16% to 61.44 euros, and Naspers' American Depositary Receipt price rose by 21% to 29.72 dollars. On June 28, Tencent fell by another 3.28% to close at 365.8 Hong Kong dollars.

How is the recovery of China's internet sector?

The Chinese internet industry has begun to recover in recent weeks.

Since May, the net inflow of funds to the KraneShares CSI China Internet ETF (KWEB) reached 0.49 billion US dollars, an increase of 35%, but still down by 48% over the past year. KWEB is currently the largest overseas internet Chinese stock ETF by asset size, with top five holdings including Tencent Holdings, Alibaba-SW, JD.com, Baidu, and Meituan-W.

As some internet giants' stock prices have dropped by 50% or more from their peaks, value management companies have started acquiring companies such as Tencent and Alibaba (BABA.US), believing that these companies will gain momentum. Their current valuations already reflect many concerns about increased competition, further weakening growth prospects – such as Tencent's core gaming business slowdown and adverse impacts of geopolitical factors.

Spinnar remains bullish on tencent and jd.com stocks, pointing out that with the relaxation of China's COVID-19 control measures and the implementation of more supportive economic policies for stability, the growth of internet sector will resume.

However, after the recent rise in the past few weeks, some people have started to become more lukewarm towards the Chinese stock market. In May, after a 10% increase in the MSCI Chinese Index, TS Lombard's Chief Emerging Markets Economist Larry Brainard believed that there would be a bullish strategy for the Chinese stock market, but he is now back to being neutral. He pointed out that the bullish strategy for the Chinese stock market is tactical and short-term, while the market faces more long-term issues.

By Barron's China Market Observation Team

Editor | Liang Mu

"Barron's China" original article, reproduction without permission is prohibited.

(This article is for reference only, investment advice does not represent the bias of 'Barron's Magazine'; the market carries risks, investment should be cautious.)

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