Tencent: One to Watch in China

07/28/2016 9:00 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Tencent: One to Watch in China

Our latest featured stock began its run to prominence among Chinese tech stocks with its development of a simple, free and reliable messaging app and a hugely popular web portal, explains Paul Goodwin, editor of Cabot Emerging Markets Investor.

Tencent Holdings (TCEHY) now has a huge user base — the WeChat mobile app alone has over 1.1 billion accounts and more than 697 million monthly active users, which powers ad sales and e-commerce opportunities.

The company has been relentless in offering new services like a digital wallet and popular online games.

Revenue growth was 29% in 2014 and 28% in 2015 and topped 30% in the three most recent quarters.

Earnings, which jumped from 42 cents per share in 2014 to 55 cents in 2015 are strong, but because only two analysts follow the company, there is no consensus about future growth.

The drivers for further growth at Tencent are strong, with one wildcard in the deck; Tencent is in talks about a major acquisition -- Finnish game developer Supercell, known for its “Clash of Clans” medieval combat game.

Investors are trying to calculate the odds that Tencent’s president, Martin Lau, can woo and win Supercell’s consent. The chart of TCEHY seems to indicate that the betting is running in favor of the buyout, and if it does happen, it could be another huge boost to Tencent’s online popularity.

Meanwhile, Tencent is already a global leader in PC games, and Supercell’s games could be folded into the mix immediately. China is estimated to provide 58% of the growth in global gaming in 2016, so the prospect is an attractive one.

Technically, this Chinese blue chip blasted out of a 14-month consolidation in May, so it’s still relatively early in its overall run should the market kick into gear. For now, we recommend buying a half of a position.

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By Paul Goodwin, Editor of Cabot Emerging Markets Investor

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