Things are going from bad to worse for China’s tech companies…
One day after the biggest drop in Chinese stocks since February 2016 as the Shanghai Composite plunged by more than 5% overnight which resulted in nearly a third of Chinese publicly traded companies, or roughly 1000 stocks, halted limit down, on Thursday afternoon the WSJ reported that Tencent Music Entertainment Group is postponing its initial public offering until at least November “because of the turmoil in global markets”, hitting pause – potentially indefinitely – on what would be one of the largest IPOs in the U.S. this year.
According to the WSJ, the music-streaming company met with its underwriting team this week to discuss the price range Tencent Music would set for its hotly anticipated IPO, but they opted to wait several weeks over worries that the market turmoil would affect the pricing. Based on early conversations with investors, demand for the listing was expected to be strong, one of the people said, and Tencent Music was expecting a valuation between $25 billion and $30 billion – a valuation range that would have made the company one of the biggest tech IPOs ever.
Meanwhile, Tencent Music’s private valuation has soared in the past year: the firm was valued at $12.5 billion late last year when it swapped stakes with peer Spotify Technology SA.
The company was expected to kick off its roadshow to sell shares to investors next week and was expected to start trading the week of October 22; however that plan is now in limbo.
The IPO delay comes amid a sudden, sharp global market rout, which sent U.S. stocks sharply lower on Thursday, one day after the Dow industrials tumbled, led by falling shares of technology companies. The S&P 500 index has declined more than 5% so far in October, wiping out almost all of its YTD gains in just a handful of days.
Meanwhile, in an ironic twist, one of the companies to have been hit hardest is none other than Tencent’s parent, Tencent Holdings: the Chinese internet giant has been crushed recently by a record-breaking sell-off, which is got worse overnight with Thursday’s 6.8% rout bringing losses since late January to $252 billion – by far the biggest wipeout of shareholder wealth worldwide. The stock, which as Bloomberg notes is one of the most widely held in emerging markets, has tumbled for an unprecedented 10 straight sessions.
It was a different story on the way up: the company’s more than 67,000% return from its 2004 initial public offering through January trounced that of every other large-cap stock worldwide. That ended in 2018 when its slide this year presaged a steep drop in tech shares from Tokyo to New York. Some money managers say it’s too soon to call a bottom.
“While it’s a good company and we obviously still like it, at the moment it’s the proxy of all the things investors want to avoid,” said Virginie Robert, the founder and president of Paris-based Constance Associes. Robert, who has an underweight position in Tencent, said she’ll refrain from adding to holdings until the company provides more clarity on its business outlook.
Founded by billionaire Pony Ma in 1998, Tencent had until recently captivated investors with its massively popular online gaming business, payments system and WeChat social networking platform. The Shenzhen-based company’s integral role in the lives of hundreds of millions of Chinese helped propel average annual earnings growth of about 48 percent over the past decade, faster than Apple Inc.’s 35 percent.
And now, just like all other tech stocks who have enjoyed a record valuation in recent months, questions are mounting over whether Tencent’s growth is sustainable. That’s partly because of macroeconomic concerns, including a slowing Chinese economy and a weakening yuan.
But the biggest worry for many observers is regulatory meddling from Beijing. The company’s cash cow, online gaming, has become a liability for the stock after an industrywide government crackdown left the business, which accounts for about 40 percent of Tencent’s revenue, clouded in uncertainty. The country halted approvals for new games in March and authorities have given little indication of when the ban will end.
Policy makers are also tightening restrictions on Tencent’s fast-growing internet finance business as they try to reduce systemic risks in an economy saddled with record levels of debt. The regulatory squeeze has contributed to a 20 percent drop in analysts’ 2018 earnings estimates since February, according to data compiled by Bloomberg.
Still, bulls argue that this year’s challenges have done nothing to threaten Tencent’s dominance in its key lines of business and that the stock will rally once regulatory and economic headwinds fade.
“We feel Tencent is as important as ever,” said Denis Barrier, San Francisco-based co-founder and chief executive officer at Cathay Innovation, which manages $1 billion. The stock rout “is not going to change the position of its market share,” Barrier said.
Even so, some of the company’s biggest long-term bulls are getting cold feet and are becoming way of piling in. Tencent’s 12-month forward price-to-earnings multiple has dropped from about 42 to 23, but it’s still higher than when shares bottomed after major declines over the past decade. Facebook Inc.’s multiple is 16, while Alibaba Group Holding Ltd.’s is 21.
“They are cheap,” said Mitchell Green, the Santa Barbara-based founding partner of Lead Edge Capital, which manages $1.5 billion. “But what is cheap can get cheaper.”
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