hapabapa
The following segment was excerpted from this fund letter.
During the quarter, we reinvested back in Tencent (and proxy Prosus) primarily because we’re observing another pattern from our playbook that we cited in our last letter: the idea that advertising is a helpful ‘switch’ that can be ‘turned on’ to enhance margins when they’re required.
Tencent’s WeChat is used daily by 1 billion people in China. Still, Tencent has historically under-monetised the advertising potential of its vast social network, relying on in-game purchases and fintech take rates. Then came TikTok (Douyin in China), where engagement was determined not by what your friends were doing but through an omnipotent algorithm delivering personalised short-form video content. Social network effects became less relevant, and eyeballs moved elsewhere.
Seeing this as a competitive threat, Tencent launched its own short-form video-much as META had done through Reels. Similarly to Facebook and Instagram, with Tencent’s daily ubiquity and existing network effects, video took off rapidly as a complement to engagement time. Once they reached a sufficient scale, management started monetising the content[1].
Our thesis is that AI is likely to enhance the opportunity by 1) improving video engagement through surfacing more personal content to users (providing more monetisable ad inventory) and 2) improving ad targeting (more relevant ads that lead to higher click-through rates) in the same way it has benefited AppLovin and Meta Platforms.
Independent of AI, if Tencent gets these elements right, each is combinatorial to growing profitability, but AI is a force multiplier.
Despite this positive backdrop, Tencent’s promising narrative is somewhat overshadowed by broader negative sentiment towards Chinese investments, which has pressed Tencent’s valuation multiples to historically low levels. In this environment, Tencent is compelled to self-heal. In response, Tencent is deploying its increasing profitability by returning capital to shareholders by boosting dividends by 42% and doubling its share repurchases over the coming year.
There is a financial link to its shareholder Prosus here. In the past, Tencent’s repurchases had little impact on their share price and were primarily a mechanism to ‘sterilise’ share sales from Prosus in its own value unlock programme[2]. We think there is a good chance that Prosus will also step up its own repurchases.
To give some sense of the scale of the repurchases, Prosus’ market cap is $75bn, and Tencent has announced $12bn in repurchases over the next year.
You’ll notice that our thesis does not rely on Chinese macroeconomic conditions. We think a combination of ‘self-healing’ and low valuations should generate a favourable return for us.
|
Disclaimer Collective investment schemes are generally medium to long-term investments. The value of participatory interest (units) or the investment may go down and up. Past performance is not necessarily a guide to future performance. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges, minimum fees, and maximum commissions, as well as a detailed description of how performance fees are calculated and applied, is available on request from FundRock Management Company (‘RF’) (‘PTY’) Ltd (“Manager”). The Manager does not guarantee the capital or the portfolio’s return. The Manager may close the portfolio to new investors to manage it efficiently according to its mandate. The Manager ensures fair treatment of investors by not offering preferential fees or liquidity terms to any investor within the same strategy. The Manager is registered and approved by the Financial Sector Conduct Authority under CISCA. The Manager retains full legal responsibility for the portfolio. FirstRand Bank Limited is the appointed trustee. SaltLight Capital Management (‘PTY’) Ltd, FSP No. 48286, is authorised under the Financial Advisory and Intermediary Services Act 37 of 2002 to render investment management services. Footnotes [1]Currently, Ad load on Tencent’s platform remains at a measly 3% whereas Western counterparts sit at ~10%. [2]Prosus is selling down its 33% investment in Tencent and using the proceeds to buy back Prosus shares trading at a hefty discount. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.