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A few catalysts have led to Chinese gaming giant Tencent (OTCPK:TCEHY) falling 28% off its all-time highs. The high was about USD 61, while the ADR now trades around USD 44. This is an extremely opportunity for investors to buy into the company’s massive gaming / social media / e-payments / advertising / cloud ecosystem at such a discounted price. First, I shall detail the key reasons behind the fall in Tencent’s share price:

1) US-China trade war

The ongoing spat between US and China over trade tariffs has led to weakness in the broad HK / China market. To give some perspective, the Shanghai Composite is down about 20% YTD, while the Hang Seng Index is down about 9% YTD. The trade war could be protracted and could yet produce more twists and turns. For now, there is a sliver of light at the end of the tunnel. Trade representatives from both sides are due to meet end-August, while Trump and Xi Jinping are expected to meet in November. If both sides are able to come to a consensus on resolving trade disputes, this could give the HK / China market a boost.

2) Weak gaming revenue in recent earnings

Tencent released earnings last week, which showed a slowdown in gaming revenue. The company reported revenue growth of 30% YoY – while seemingly stellar, still fell short of analyst expectations. Tencent attributed the slowdown in gaming revenue to bureaucratic reforms, which has seen regulatory approval for new games suspended since March. The bureaucratic reforms are part of Xi Jinping’s plan to give his party more oversight over day-to-day governance, and are not specifically aimed at clamping down on the gaming sector at large. I would expect Tencent to obtain approval for new games after the regulatory reforms are bedded in.

3) Frothy Expectations

Prior to earnings this year, all 51 analysts covering Tencent all had a “buy” recommendation on the stock, even despite its weak share price performance since the start of the year. As shown in the chart from Bloomberg below, Tencent has not had a single sell rating since 2016, which showed just how frothy the expectations were of Tencent.



Source: Bloomberg

After earnings, 15 analysts moved to lower their target price on the stock by an average of 6%. Morgan Stanley has removed the stock from its focus list, and Bank of America Merrill Lynch has downgraded its rating on the company’s bonds, citing higher regulatory risk. Ironically, these are the things that are in an investor’s favour, as they indicate less frothy expectations and positioning for the stock.

Near-term bottom for Tencent?

These 2 factors have resulted in Tencent share price sliding close to 30% from its peak, and I believe we could be looking at a near-term bottom for the share price. After hitting a low of USD 40 post-earnings last week, Tencent’s share price actually managed to rebound about 10% from the low. The rebound also occurred close to technical support, which comes from the uptrend channel the stock had previously broken out of. This technical support is demarcated in the share chart below.



In addition, aside from the weak gaming revenue Tencent posted, there were other segments of its business that did well. Revenue for other businesses, including payments and cloud services, jumped 81% for the 2nd quarter. The company’s WeChat user base also cross more than 1bn in monthly active users, which increases the company’s monetisation capabilities.

Tencent has suffered collateral damage from external events this year – US-Sino trade relations, as well as bureaucratic reforms in China hampering its gaming business segment. However, there are signs the company’s luck may be turning. I have detailed in my previous article “Tencent: Enormous Potential, Multiple Growth Drivers” why the company will remain as one of the world’s most profitable in the years to come, and recent events have not changed the fundamentals of this company. This is a rare opportunity to buy Tencent at a hugely discounted level.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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