Tencent shares losing USD35b shows depth of China gloom

For a clue on how bearish foreign investors have become about Chinese stocks, take a look at Tencent Holdings Ltd.

The Shenzhen-based technology giant has tumbled 13 percent from its September record, wiping USD35 billion off the value of its shares, as overseas funds pulled money from Hong Kong and Chinese equities. The company’s large weighting on the Hang Seng Index – at 10 percent – helped make Hong Kong’s benchmark stock gauge one of the world’s worst performers last quarter.

The company, which has more buy ratings than any other in Hong Kong, is a victim of fund redemption pressures, according to Asset Management One Singapore Pte. Investors pulled about $409 million from exchange-traded funds that buy Chinese and Hong Kong stocks in the week through Dec. 21 as concern grew over a weakening yuan and tighter liquidity.

“If there are fund redemptions, it’s hard to avoid selling Tencent because its weighting is so big,” said Toshihiko Takamoto, a Singapore-based portfolio manager at Asset Management One.

Tencent fell 0.2 percent at the close. The stock was the second-largest drag on the Hang Seng Index in the fourth quarter, after AIA Group Ltd. The Hang Seng Index tumbled 5.6 percent in the period as China’s currency plumbed lows not seen since 2008 against the dollar and concern about rising money market rates spurred a record meltdown in the nation’s sovereign debt.

Such has been the exodus that the top U.S. ETF focusing on China suffered the biggest outflows among emerging markets, sending total assets to the lowest level in a decade.

U.S. Federal Reserve officials last month increased their projections for interest- rate increases this year, triggering a surge in the dollar and Treasury yields. Higher U.S. bond yields will cause outflows from emerging markets and Hong Kong, Australia & New Zealand Banking Group Ltd. has warned.

The selloff hasn’t shaken analysts’ faith in the stock. Tencent has 43 buy ratings, 2 neutral recommendations and zero sells, according to analysts tracked by Bloomberg. The average 12-month target price implies a 26 percent advance over the next 12 months.

Analysts have their reasons to be optimistic. Tencent shares have rebounded after each selloff to make new highs during its 12-year listing, while the stock is the best performer on the Hang Seng Index in the past five years with a 500 percent gain.

The company reported a 43 percent jump in its third-quarter net income as its ability to attract Chinese gamers and social media helped fuel advertising growth. Profit is expected to continue growing for at least three more years, according to data compiled by Bloomberg.

There are signs investors are turning less bearish. The stock gained 5.6 percent last week, its first weekly advance since late October, and rebounding from a five-month low.

“If you focus only on its fundamentals, the stock is still a buy,” Takamoto said. Kana Nishizawa, Bloomberg