Tencent Holdings Ltd, also known as Tencent, is a Chinese multinational technology conglomerate holding company. Founded in 1998, its subsidiaries globally market various Internet-related services and products, including in entertainment, artificial intelligence, and other technology. Its twin-skyscraper headquarters, Tencent Seafront Towers (also known as Tencent Binhai Mansion) are based in the Nanshan District of Shenzhen.Tencent is the world’s largest video game vendor, as well as one of the most financially valuable companies. It is among the largest social media, venture capital, and investment corporations. Its services include social network, music, web portals, e-commerce, mobile games, internet services, payment systems, smartphones, and multiplayer online games. Offerings in China include the instant messengers Tencent QQ and WeChat, and one of the largest web portals, QQ.com. It also owns the majority of Global’s music services (Tencent Music Entertainment), with more than 700 million active users and 120 million paying subscribers.– Tencent – Wikipedia
Tencent Holdings caught my eye a while ago because I play Fortnite, the most popular game in the world. Tencent own Epic Games who produce Fortnite. Even though it is a very small part of Tencent I’m glad it showed up on my radar. Tencent Holdings is now one of my largest position in my pension portfolio. I also own Tencent through Prosus. With the pandemic many gaming related stocks have skyrocketed. Is Tencent overvalued?
The numbers analysis below is the first step in Rule 1 Investing by Phil Town. In his book Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! (no affiliate) he writes about his investing philosophy which centers around four key principles he refers to as the Four M’s: Meaning, Moat, Management and Margin of Safety.
The first requirement is an average annual growth rate of at least 10%, the past 10 years, in the ROIC (Return On Invested Capital), Sales, EPS (Earnings Per Share), Equity and Cash Flow. The average 5 year and 1 year growth rates should also be above 10%. High growth rates suggest a sustainable MOAT.
Next step is to analyse the the Four M’s: Meaning, Moat, Management and Margin of Safety.
The aim is to find a fantastic company, with a great track record, to invest in for at least 10 year. The expected average yearly return is at least 15%. This is used in the calculations. With an investment of 100 USD and a yearly return of 15%, 100 USD will have increased to 405 USD in 10 years time because of interest-on-interest or compound interest.
|Operational cash flow (MUSD)||1512||1602||2116||2498||3648|
|Operational cash flow (MUSD)||4684||6238||10726||12086||13875|
ROIC and P/E are gurufocus.com. The rest are from macrotrends.com
Compound Annual Growth Rates (CAGR)
|10 year||5 year||1 year|
|Sales Growth Rate||39%||35%||16%|
|EPS Growth Rate||30%||30%||13%|
|Equity Growth Rate||41%||38%||31%|
|Cash Flow Growth Rate||28%||31%||15%|
|Growth ratesx2||Average||Median P/E||Average between the high and low P/E||Conservative (using lowest Equity GR, 31%)|
|Calculated future price in 10 years||3740||1670||1652||2696||792|
|Margin of Safety (50%)||467||209||207||337||99|
Current price: 75.14 USD
Fair value price range: 413 – 935 USD
MoS price range: 207 – 467 USD
Using conservate Equity Growth rate of 31% (lowest) and P/E 38 (lowest) gives a fair value of 198 USD and MoS of 99 USD.
To be considered for further analysis here, as a growth stock, the requirement is that the 10 year yearly average growth rate is at least 5% in all five categories. They are.
If the numbers are correct they suggest that Tencent Holding is undervalued as long as they can sustain the same growth rates. I will try to do a more indepth analysis at a another time.
Even though I already have positons in Tencent Holdings I might look to add.