Recent Divestments Among Tech Giants
We saw the recent news on divestments among tech giants where Alibaba is in discussions to pare down its stake in Weibo after Tencent announced paring its stake in JD by way of a special dividend. We think the move could reduce the tech giants’ influence in China’s internet industry, which complements the government’s anti-trust measures. We maintain our MARKET WEIGHT view on the internet sector with Alibaba as the top pick.
WHAT’S NEW
• Overview on China’s internet sector. We saw divestment news recently among the tech giants: a) Tencent to give out special dividend of up to 457m Class A ordinary shares of JD.com on the basis of every Class A ordinary share of JD for every 21 shares held by the shareholders, and b) Alibaba is in the discussion stage to reduce its stake in Weibo by 30%. Recall back in 15 March, the Chinese regulator had instructed Alibaba to divest its stakes in various digital & media (DME) businesses on allegations that excessive media ownership will prompt potential manipulative activities by the company. On top of that, ever since the start of the sweeping anti-trust regulations in last year, we saw the State Administration for Market Regulation (SAMR) imposing various fines of up to Rmb500,000 (per case) on internet giants such as Alibaba, Tencent, Meituan for failing to report M&A deals. While we could see the tone of the anti-trust regulations was rather soft in 2021 (as attention was shifted towards cybersecurity), we still think that the divestment could be favourable with the regulators’ ambitions to clamp down on a single entity owning and controlling massive user data in China. On the flip side, we think the potential divestment could mean Alibaba losing control in terms of strategic planning of the company if Daniel Zhang (CEO of Alibaba currently sitting in the board of Weibo) steps down after the divestment.
• Our view on Alibaba. We think the divestment will not have any material financial impact on either Alibaba or Weibo for the reasons being; a) although the strategic collaboration agreement between Weibo and Alibaba had expired on Jan 2016, we notice that the revenue contribution from Alibaba to Weibo had declined over the year to just 3.4% in 3Q21 vs 32.7% back in 3Q14 when Alibaba just became their shareholder in April 2013; and b) based on our back of envelope calculation, the divestment will only resulted in 3.8% decline in share of equity investees under Alibaba’s income statement (if based on Sept’21 result) which in turn will lead to 0.7% drop in non-GAAP net profit for the period.
• Our view on Tencent. Tencent paid the special interim dividend it declared, in the form of a distribution in specie of 457.3m Class A shares of JD.com or a HK$127.7b value paid to Tencent’s shareholders, implying an effective 3% special dividend. Similar to Alibaba, Tencent’s share of loss/profit from associates/JV (loss making during 3Q21) is expected to narrow to -Rmb2.9b from -Rmb5.7b. In such case, Tencent’s adjusted net profit is expected to see an upside of 8.6%. We also believe the value of minority investments will gradually unlock, while shifting their attention towards core businesses (online game and enterprise services). We expect Tencent to continue to selectively de-vest in part of its portfolio of listed Chinese companies and return capital to shareholders. Currently, the worth of investees is estimated at US$130b or HK$106.90 per share.
ESSENTIALS
• Fundamentals remain unchanged. All in all, it is still business as usual for Alibaba after the divestment as we think the overall regulatory risk has been priced in at this juncture. We would like to point out several considerations which investors should focus on for Alibaba:
i) Potential widening loss from key strategic investment. During 2QFY22, Alibaba’s key strategic investments had yield an adjusted EBITA loss of Rmb19b (vs Sep 20: Rmb6.4b) with community marketplace and Taobao Deals accounting for a larger share of the losses followed by merchant support initiatives. We think Alibaba needs to continue to penetrate into the lower tier cities in search for new user growth as we estimate core commerce adjusted EBITA to stay below the 30% mark until FY26.
ii) Near-term headwinds persist. Xian has imposed lockdown measures due to the resurgence of COVID-19 cases. On top of that, several provincial governments have encouraged the celebration of Chinese New Year locally to curb the spread of the pandemic prior to the Winter Olympic in Feb 22. As such, we think consumer sentiment will be deeply impacted leading to reduced spending on discretionary goods while spending on staples goods should benefit.
iii) Interoperability with Tencent. We had still yet to see Taobao Deal being available on the WeChat mini-program since the news circulated in Mar 21. In terms of the interoperability, we only saw Taobao Deal enabling the WeChat pay QR code payment function during 11.11 but the user experience was still rather bad (as consumers were still unable to pay directly via WeChat pay). Till then, we still think that by removing the “Wall Garden” among internet giants, it will ultimately create mutual benefits for the users and platform operators in the long term.
• Tencent. The divestment could be a short-term positive for Tencent given that most of its investees companies (like Meituan, JD, Bili) were still loss making (under PATAMI line). However, the key lingering issue with Tencent was still due to the suspended new game licence approval which happened since Jul 21. On top of that, Tencent will divest 14.5m shares in Sea, reducing its stake from 21.3% to 18.7%, at a selling price of US$208.00- 212.00. This will bring the total divestment to up to US$3.1b. Tencent will be subject to a lockup period which restricts the further sale of Sea shares held by Tencent during the next six months. We think the divestment comes amid slowing e-commerce revenue growth from Sea in recent quarter as well as the intention of Tencent to selectively divest its investees holdings to return capital to shareholders.
• Total investee valuation. We had Ant Group, Weibo, Suning, Alibaba Picture, Didi, Momo, Bili and Groupon in Alibaba’s SOTP valuation, which accounted for 3.2% of our target price of HK$173.00. Meanwhile for Tencent, we had companies such as Didi, Meituan, PDD, JD, Bili, Kuaishou which accounted for 19.2% of our target price of HK$557.00.