22 April 2019
After positing decent gains on its debut in New York on Dec, 12, Tencent Music slipped below the IPO price on Friday. Photo: Reuters
After positing decent gains on its debut in New York on Dec, 12, Tencent Music slipped below the IPO price on Friday. Photo: Reuters

Do not hold onto Tencent spinoffs

One tough lesson investors should have learnt by now is this: avoid holding onto Tencent spinoffs.

To be specific, if you happen to land any shares of the units that the Chinese internet giant has spun off, do not hold them for more than a day.

For years, Tencent had been like a magician, churning out market-beating results continuously. But the lucky streak ended in the second quarter this year, when the company posted its first quarterly profit decline in 13 years.

Concerns over slowing growth and Beijing’s tighter regulations on online gaming firms led to Tencent getting pummeled on the stock market, pulling it from the peak of over HK$475 early this year to the current levels of just over HK$300.

Now, the picture is not much better even when it comes to the entities that Tencent had spun off in the last 18 months. Of the eight ventures that the Chinese firm cashed out through separate listings, seven have dipped below water.

The latest to join the list is Tencent Music, which fell below its IPO price of US$13 on its third day of trading on Friday after its debut last week in New York.

If investors had cashed out on the Dec. 12 listing day, they would have reaped a minimum 8 percent gain, but those who have held on have lost out, at least for now.

As of Monday close, Tencent Music was at US$12.13, down 6.7 percent from the offer price.

Tencent has made good money as the unit raised US$1.1 billion in its IPO, giving the music streaming giant a valuation of about US$23 billion.

But the same cannot be said of investors in the unit — unless they were savvy enough to cash out on the debut — or the effect it had on the broader market sentiment.  

No wonder, we have seen a headline such as this on Seeking Alpha, the crowd-sourced financial news platform: “Tencent Music IPO: Good news for Tencent but Bad News for the Stock Market”.

The logic is simple enough: Tencent made a shrewd investment by taking a minority stake at a dirt cheap price but managed to sell out a portion at sky-high price.

The same strategy was evident in the group’s e-book venture China Literature, which posted an almost 100 percent gain on debut in July 2017 before falling below the IPO price this summer and is now one-third down from that level.

Ditto for car trading platform Yixin (down 75 percent), online insurance Zhong An (53 percent), online video Inke (42 percent), food delivery Meituan-Dianping and game distributor Idreamsky Technology (13 percent).

Altogether that was a value destruction of some HK$40 billion. Only travel portal Tongcheng Elong managed to hold up somewhat, with a near six percent gain since its debut last month.

Well, try to bet on the same, not the opposite, side as Tencent boss Pony Ma next time.

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EJ Insight writer

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