PSG: NO exposure to Tencent

After analysing Tencent’s interim results for this year, PSG Wealth’s team of equity analysts recommend zero-percent exposure based on the following key aspects:

* PSG Wealth believes a high growth rate has already been priced into the valuation and that Tencent is fairly valued.

* Accurate forecasts are difficult to make due to regulations set out by Chinese authorities and due to a slower advertising market. This could negatively affect Tencent’s gaming and advertising operations.

* The group’s price-earnings ratio is trading at a discount to its historical average, however, PSG estimates that growth is likely to be lower than the historical five-year compound annual growth rate of 35%, due to the higher base and the maturity of the online advertising market. PSG believes that a lower P/E multiple is appropriate. Even after the recent price declines in Tencent, the group is still trading at a substantial premium to international peers.

* PSG feels the current market expectation for revenue growth is optimistic given the slower macro-economic environment and the potential impact of regulation. Despite the recent downgrade to earnings estimates and expected net margin, PSG believes current earnings estimates are at risk.

* At the beginning of this month, the group announced that it would be restructuring its operations. A new group will be created to focus on the cloud and smart industries. Another new group will combine the social media, mobile internet and online media operations, to make co-ordination more strategic. A technology committee will also be created to focus on R&D and push for innovation. Staf

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