Continued assessment of its investment portfolio

■ Sea Limited issued a press released on 4 Jan 222 that mentioned that Tencent had informed Sea Limited that it would convert all its Class B ordinary shares into Class A shares.
■ Reuters reported that Tencent would cut its stake in SEA Limited.
■ If the deal goes through, it will be Tencent’s second off-loading of an investment in an internet company in a short period of time.
■ We hold a constructive view on the Tencent’s intention to enhance shareholder value.

Reducing voting power to less than 10%

● Sea Limited issued a press release on 4 Jan 22 stating that it will hold its AGM on 14 Feb, and that it proposes to increase the voting power of each Class B ordinary share from three votes to 15. The press release also mentioned that Tencent had informed Sea Limited that it would convert all its Class B ordinary shares into Class A shares, subject to a special resolution approved by shareholders at the AGM. If Tencent’s conversion is approved, all outstanding class B ordinary shares will be owned by SEA Limited’s founder, Forrest Li, and Tencent will terminate its proxy with Mr. Li, dated 1 Sep 2017. As at the date of the press release on 4 Jan 22, all the outstanding Class B ordinary shares represented about 52% of the total voting power, and Mr. Li had about 54% of the voting power with respect to the size and composition of the Board of Directors. After the changes, Mr. Li will have 57% of the voting power and Tencent less than 10%. Reuters reported that Tencent also aims to cut its stake in Sea Limited from 21.3% to 18.7%. Tencent will be subject to a six-month lock-up period, and it intends to retain the substantial majority of its stake in Sea Limited.

Initial view

● If the deal goes through, it will be Tencent’s second off-loading of an investment in an internet company in a short period of time. Recall that on 23 Dec 21, Tencent declared a special interim dividend in the form of a distribution in specie of Class A ordinary shares of JD.com (link). We hold a constructive view on the Tencent’s intention to enhance shareholder value, and we don’t expect a material change in business cooperation between Tencent and Sea Limited.

● We currently have an ADD rating on Tencent, with a DCF-based target price of HK$520.3.