Numbers analysis: Tencent Holdings (TCEHY)

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.[3] 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,[4] as well as one of the most financially valuable companies.[5] It is among the largest social media,[6] venture capital, and investment corporations.[7][8] Its services include social network, music, web portals, e-commerce, mobile games, internet services, payment systems, smartphones, and multiplayer online games.[9] Offerings in China include the instant messengers Tencent QQ and WeChat, and one of the largest web portals, QQ.com.[10] 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

Introduction

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?

Charts

10 year weekly chart
1 year daily chart

Statistics

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.

Year20102011201220132014
ROIC64%35%28%22%20%
Sales (MUSD)290844176966976112850
EPS (USD)0.130.170.220.270.41
Equity (MUSD)323245096689944213370
Operational cash flow (MUSD)15121602211624983648
P/E
Year20152016201720182019
ROIC15%14%15%12%12%
Sales (MUSD)1655222867351884724854594
EPS (USD)0.490.651.111.241.4
Equity (MUSD)1964728030410105382370733
Operational cash flow (MUSD)46846238107261208613875
P/E4138473234

ROIC and P/E are gurufocus.com. The rest are from macrotrends.com

Compound Annual Growth Rates (CAGR)

10 year5 year1 year
ROIC (average)24%14%12%
Sales Growth Rate39%35%16%
EPS Growth Rate30%30%13%
Equity Growth Rate41%38%31%
Cash Flow Growth Rate28%31%15%

Price calculations

Growth ratesx2AverageMedian P/EAverage between the high and low P/EConservative (using lowest Equity GR, 31%)
P/E8638.4386238
Calculated future price in 10 years3740167016522696792
Calculated Price935417413674198
Margin of Safety (50%)46720920733799


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.

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