As of Wednesday, Tencent has bought HK$11.4 billion (US$1.45 billion) worth of its own shares since the beginning of the year, compared to HK$2.6 billion last year.
More than 40% of the repurchases this year occurred after Dutch technology investment company Prosus – which had a 28.8% stake in Tencent – and its controlling shareholder Naspers of South Africa announced on June 27 that they would shed some of their stake in the Hong Kong-listed company to fund a share purchase program of their own.
Tencent’s shares have fallen nearly 20% since Prosus’s announcement.
The internet and gaming company’s revenue shrank 3% to 134.03 billion yuan (US$19.8 billion) in the April-June period, marking the first quarterly contraction since its 2004 listing after its core businesses were hit by China’s economic downturn and regulatory uncertainties.
In a conference call with analysts last week, Tencent’s chief strategy officer James Mitchell said the company’s shares are “very undervalued” and that it has “substantial ammunition” relative to its US$370 billion market cap to continue funding dividends and buybacks “at an aggressive rate”.
Anand Batepati, portfolio manager at GFM Focus Investing, said the size of the stock buyback carries a hidden but positive message for investors.
“HK$11 billion sounds big, but it is less than 1% of their market cap even after that market cap has fallen big, by 40% in just over a year,” he said. “If they really just wanted to take advantage of their stock’s undervaluation, then their buyback would have been five times bigger, as they already have the cash lying around to fund that immediately,”
“I think that the real good news is that the buyback magnitude is small and that the real message in the buyback is that management still sees opportunities that are better than buying back stock in their own business,” Batepati added.
Tencent has historically invested around US$16 billion a year in startups. With the current government crackdown, the pace of that investing has slowed noticeably.
Travis Lundy, an analyst at Quiddity Advisors, which posts on the SmartKarma platform, echoed the view that the total buyback so far is not “huge”.
“They bought back a bunch of shares in March and April then cancelled those shares, but issued just as many new shares as part of an incentive scheme. So some of that buyback was to avoid dilution,” he said.
By reducing the number of shares available on the market, a share buyback can increase the earnings per share of those that remain, thus benefiting shareholders even when a business is not growing.
During the second quarter, Tencent axed some of its non-core businesses, including online education, e-commerce, game livestreaming and digital content services. This triggered several rounds of layoffs, reducing the number of employees by nearly 5,500 – or 5% of the total – during the June quarter. The company has also tightened marketing spending and trimmed operating expenses to save costs.
Revenue of Tencent’s core domestic gaming business slid 1% to 31.8 billion yuan in the June quarter due to fewer big game releases, lower user spending, and the impacts of government measures to protect minors. Neither Tencent nor top rival NetEase has received approval to launch new paid games since July last year.
Not everyone sees a positive side to Tencent’s buyback, however.
“Telling investors that the stocks are under-valued is a nice way (to explain the move) compared to other reasons for buybacks,” said Ke Yan, research analyst at Singapore-based DZT Research.
“But in general, instead of finding investment opportunities that could generate high returns, the company utilising cash to buy back its own shares is sending signals that it does not have a better way to generate returns.”
“You can see that Tencent’s buyback last year was not that effective when it comes to convincing investors of their undervalued shares, as its stock continues to slide this year,” Ke added.
Wealth manager Tariq Dennison of GFM Asset Management said two interpretations – one positive, one less so – are indeed possible. But he seems to agree with Ke.
“Like many shareholders, I also see this as a sign that Tencent’s growth is slowing. If it weren’t, Tencent would be reinvesting everything rather than doing any buybacks,” he said.
Tencent is not the only tech titan whose buyback moves have failed to boost share prices.
In March, Alibaba Group Holding increased a stock buyback programme to US$25 billion from an earlier US$15 billion in its biggest such offer, saying its shares were undervalued. The announcement pushed shares of the e-commerce conglomerate up 11% on the day, but share prices have since fallen 25%.
Also in March, Chinese smartphone maker Xiaomi announced it would buy back up to HK$10 billion of its shares, or 3% of its total market cap, on the open market under a repurchase programme after its share price plummeted 60% from its 52-week high. Like Alibaba, its shares soared on the day of the announcement but have since fallen about 20%.