We chatted with the founder of SGBudgetBabe, Dawn. Dawn is one of the most popular personal financial blogger in Singapore. Her candid sharing on savings, insurance and even wedding expenses have been inspiring for many. Dawn is also an avid value investor and she shared with us one of her favourite technology stocks of all time, Tencent Holdings Ltd (HKG:0700).
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*Disclaimer: The show is for entertainment purposes only, and should not be taken as investment advice. Please seek professional advice or do your own research when making any investment decision.
Disclosure: Dawn owns Facebook Inc at the point of recording. Stanley owns Tencent Holdings, Alibaba, JD.com, Alphabet Inc, Apple Inc, Facebook Inc and Baidu at the point of recording.
is investing ideas by ValueInvestAsia.com.
Stanley: Hi guys, this Stanley again,
welcome back to Investing Ideas. This week, we talked to Dawn, the founder of
SG Budget Babe, a very popular personal financial block here in Singapore. Dawn
is kind enough to share with us one of her favorite stock right now, which is Tencent
Holding. If you guys know Tencent Holding is also one of my personal favorite
stock. But in this interview, I’ll try to be the devil’s advocate in
challenging her idea and why she’s so convinced that Tencent would still sort
greater heights in the future. So without further ado, let’s get started.
this is Investing Ideas. Where we talk to investors from all walks of life,
learn from them and find out some of their favorite investment ideas.
Stanley: Hello Dawn, how are you?
Dawn: Hi Stanley, how’s…
Stanley: Hey, thanks joining us. You
know, every week, we have this episode on Investing Ideas where we talk to different
investors around and is a great privilege that we can speak to you as well. Maybe
for those who might not have heard of you or your blog, maybe why don’t you
give a little bit introduction about your blog and what do you do?
Dawn: Yeah, sure. So hi,
everyone. My name is Dawn and I write at sgbudgetbabe.com. So I started writing
in late 2014. So it’s been more 5 years, but almost 6 years right now. And it
really about like you know, personal finding. And in the beginning, it was
centered a lot on like how I save money, how I kind of like spent it, what type
of insurance to get and whatnot.
like after a while, I started to realize that, you know, there’s only so much
to be cut but not rule. And if you’re in a job where your salary is determined
by someone else other than you, then you can’t keep banking on that one source
to increase your earning income. So what I thought was, you know, I need to
start looking outside for other sources and that was when I got introduced to
and thanks to a reader who left some comment on my blog and I’ve got other
reader jump in, you know, like more experienced people guiding you, young, 20
something year old girl who just saved $3,000 and trying to explain to her
that, instead of leaving in a bank account, why not you start looking into
investment? So that really intrigued me and that was when my investment journey
initially started off by reading lots, lots of books, you know, like The Intelligent
Investor and I devoured lots of stuff about Warren Buffett, Peter Leech and all
the other seasoned legendary investors in the market. But one thing I realized
was, you know, a lot of the books and investing literature right now is
centered on the US market, Western market, Western Wall and a lot of it is not
really applicable to Asia. So that was when I realize, okay, so maybe now I
should start looking into more Asian centric insight and start talking to more
like Asian investors, read Asian Business News. So then [inaudible 03:20].
think later on in 2015, in 2017, those 4 years where I really wanted to expose myself
more to other investors. And then there was where I attended like you know, course
series and got to know a different approach to how these investors look at
Asian stocks and that was really helpful for me. In fact, I actually kind of
wished that I started to all of these course upfront, investing too much of my
time. And a lot of mistakes that I made using just US metrics and US approaches
that weren’t, in fact, relevant to Asia.
you know, I just give you examplelike
in the US, right, you know, they’re very, their NCC works and how they run
their [inaudible 04:05] is very
clean cut. But you know, that’s
truly not the case, right. In fact, in Asia, you do a lot of business, pure
relationships, right? You will give this business to, let’s say, your
brother-in-law’s company or like your, this girl you’re dating, you want to [inaudible 04:21] father or parent
company. So a lot of these kind of things which makes it a little bit mucky,
but is it really the case in US because of a whole different regulatory
yeah, then what I decided, you know, like I write in my insight on my blog. So
I’m also really thankful that lots of people find that useful and they’ve
sharing it. So like in a span of a night, it’s been almost more than 5-6 years
and I think moving forward and is going to be a lot of more writings that I’m
doing. And yeah, I look forward to hearing from everyone and [inaudible 04:53] find that useful.
Stanley: Amazing. Amazing. Wow! I
have to say because in the view of financial blogging and especially when we
talk about investment since I have been in the field for quite some time, it is
very, very hard to find a female like writer like yourself who is very learned
in investing and also interested in investing. Do you feel quite lonely in this
Dawn: No. Actually, I think it’s an advantage.
Right? Like I mean, you know, it’s really the mindset. A lot of people look and
say like you know, no real good female investor. All of the good ones are male.
Like there’s no good female writer, they’re all guys. But I’m like, hey, why
should we let our gender define us? I think I want to be known for who I am and
what I am, rather than what I’m not as.
yeah, and actually, being a female gives a very different approach to things.
Because I realize, right, a lot of your investors tend to be very quantitative,
right? So I think that’s why we do so much
so, because like, you also look a lot in quality and that kind of, you know,
and more to it. So like the females, we tend to see things a little bit
differently. We also look at how management manages staff, what kind of
incentive to help their staff grow, what kind of authority, leadership? Whereas
like, you know, the males are very quantitative driven on TE. Right? I actually
really watch TE and I don’t read. I’m a big believer, mainly because I do have
a time that I can use, that I put aside for that.
think being female actually gives an advantage, because like, I tend to see
things in a slightly different light and that is why I hope like this also
inspires and motivates more females out there. Because a lot of like for Asian
women have just been delegating the financial stuff to their male like their
husband and they don’t really work on being financially independent. They feel
that they’re not good enough. But I want to change that whole mindset, you
know, it’s like you’re good enough and you stay and you think that you can be.
So I think this is actually a good spot to be either.
Stanley: Yeah, definitely. Yeah,
definitely, breaking new barriers and hopefully more and more female bloggers
and also female investors will start sharing their views so that we can have a
more, like I said, a more diversified view in this space. I understand that
today you have prepared a wonderful stock for us to share with. And before
that, why don’t you share a little bit about how you construct your portfolio?
Like normally how many stocks do you think that is a good size of your
portfolio, the number of stocks that you should have or you have right now in
your portfolio and which market are you generally more focused on inside your
Dawn: Okay. So, a quick introduction
to my investing approach. Actually, I like all the different account and tested
before you use. Right? So, my key was the dividend investing. I also love value
investing. I like looking for undervalue of stock. And I also love growth
investing. So it’s really about marrying all three together. And that’s why like
when I invest, although I do kind of separate my portfolio, because like my
dividend portfolio is one that I’m banking on to really see me through
retirement as well through passive income. And then I’m using my value stock
portfolio to really like look for good capital gains and returns by identifying
what the market is undervaluing. And then my growth portfolio is really
something for the future. So I try to marry all three of them if I can and find
companies who pay out dividends, are not overly valued, but yet have great
growth potential in the future.
you know, like I think the stock and I will be sharing with you today doesn’t
really quite fit into that if you [inaudible
08:41], right? So this stock that doesn’t really fit in there, it actually
is quite overvalued at the moment. But my thesis and my view is that it will
only keep going up. Because it reminds me a lot about when I was looking at
Google back in early 2016 and I was just like, oh my goodness, is so expensive.
I think back then, it was like $600 or $900, I felt like, so expensive. You know
why [inaudible 09:09], just look at where
Google is right now. So this stock reminds me a lot about that experience and
that’s why I think, like this valuation can only get even higher because it’s a
lot of the work that the company is doing now has a very good proven track
record. And in the future, it should continue to grow.
what kind of, how many stocks I have my portfolio? That really can vary. I
don’t really quite limit myself so much in point, sometime my bank rate, how
much I can monitor. But right now, I think I have, say, less than 30 in my top
portfolio. And a lot of the markets are like SGS as well as the US. I don’t
have much in Hong Kong at the moment, but with that project, and now the virus,
you [inaudible 09:53] I’m looking to
get into. So these are the three main market that I see great potential for.
Stanley: You definitely have a lot
of experience under your belt on investing. And I guess this company is, like
you said, you haven’t really invested into the Hong Kong market and yet this
company is, you know, one of the largest on the Hong Kong exchange. I
definitely, am very excited to hear it from you. Why don’t you go ahead and
introduce the company to our audience?
Dawn: Yeah, sure. So, for those
of you who are unfamiliar, this is one stock that I feel is undervalued,
although many people argue otherwise. And I think the main reason is because
we’re not really factoring in the growth potential that has in the future,
which is really, really huge. So let’s just talk a little bit more about growth
stocks, right? We have to and I think very differently. And I think there’s not
a lot of literature on good investing groups out there that really talks about
it. They do have lots of literature on like dividends and undervalued stocks,
even more [inaudible 10:51].
even if you look at Warren Buffett in recent years, he’s also starting to shift
a little bit more to growth stocks, right. You’re seeing that every week. So
growth stock, what I typically look at really high quality businesses and they
should be positioned in a growing industry of the future. For example,
ecommerce, healthcare, solar power, clean energy, so those kinds of stuff or more
even biopharma, so on and so forth.
ideally, they want to have a certain level of moderate to high barriers of
entry. Because if it’s too easy and everybody will just jumping on it [inaudible 11:24]. So we don’t want that.
You could be like number one today and like out of the race tomorrow. So we try
to look out for those kind of growths.
And the key thing to note is that valuations
are seldom cheap. So if you grew up or if you’re exposed right to the beginning
and to the whole Warren Buffett philosophy and [inaudible 11:42], then this is quite difficult to switch, right
because it warrants a whole shift in your mindset and how you look at things. But
honestly, I do know it does speak for itself. And if we look at how growth
stock have performed in the last few years, last 5 to 10 years, they’ve
actually returned [inaudible 12:02]
you, and well, better returns in your money than just value stock let’s say. So
this is where I need it.
the stock for my people today, definitely, Tencent. So listed on the Hong Kong
Stock Exchange and it had the market capitalization of I think about 20
trillion HKD right now, is the largest stock on the Exchange and its revenue is
more than 300 billion RFB. So it’s huge. It’s fine and it’s big technology
gigantic that has its arm, the fingers in almost every single [inaudible 12:36]. And its profit is
also really, really good. Out of that revenue, almost one-third of it are
profit. So those are really good margins that we’re seeing.
this is the part that’s very difficult, right, because the value invest [inaudible 12:51] funding that are
cheap, but their PE for this company is currently not cheap at all. And I was looking
at it late last year and because I was trying to look at another MPE, it was at
about 38 or 39 times PE today. Latest review is like 41. So yeah, not cheap at
all. Right? Let’s see whether this is a good one PE. Right?
the key thing is that, you know, one of the biggest, biggest revenue contributors
for Tencent is in the gaming market. And in China, you have a lot of brand
competing for this share of the pie such as you know on Tencent that is [inaudible 13:30] working in that. So
lots of competition out there. But it is quite howling that Tencent actually
dominates the China mini mobile market. So that’s one good pie, right? But you
know if, I mean, China is really big enough as a market, but we don’t want to
just stop there. Let’s think of globally. So how many look like globally? Basically,
if you look at the biggest company making the most money from games, the
basically number one place is Tencent. Number two is Sony. Number three is
Activision Blizzard and [inaudible
13:30] is in fifth place. Right?
think that’s a really strong revenue contributor segment that will continue to
grow. And although there’s been some negative news recently because of the
Chinese Apple there’s stepping down and slowing game approvals. I think that
whole part has been really blown out of proportion. And recently, one of the
most recent launches so… pretty well. So I think that’s lots of opportunities
out there for them to grow this market further. And, you know, if you look at
these other competitors, what are the other competitors in the technology
space? And how do they exactly compete or compare to America one?
this side, I found this really useful infographic that looks at all of these [inaudible 14:48] and you’ll be able to
see, right, visually like Apple we all know it’s like a big giant. I regret
selling my Apple share so early.
Stanley: I’m sure you are well
compensated for your investment.
Dawn: [inaudible 15:00] mistake.
You guys know back then I really was subscribed to the whole value philosophy.
And then I made a lot of mistakes on those stocks selling them instead of
holding them all the way. Yeah, so because at the time I sold it, the value was
[inaudible 15:17]. Yeah, but you know,
just look at that, it just got more and more expensive. So that’s the thing,
right, the possibility what we call the mobile phone with now… sell for $1,000,
anyone call you greedy, but look the way we are now. So I think that [inaudible 15:31] that we need to look
at for the future as discretionary income kind of growing up and Apple right
now is like this huge big circle. And then Amazon is the next and followed by Alphabet.
So if you look at Tencent right now, it’s almost the same level as Facebook. And
I think Tencent is actually not even just Facebook, they are more like Alphabet
but in my opinion.
we’re going to look at the verticals later on and you understand why I feel
this might just be next Asian Google.
Okay? So if we will look at social media then which is another segment,
Facebook and WhatsApp are obviously will go number one, right. No competition
there. But it’s interesting to look at the next few ones which is QQ and WeChat.
In fact, WeChat is bigger than Instagram, although these numbers might have
changed in recent years ever since Facebook acquired Instagram account combined
those numbers together. But WeChat is huge and it’s very, very strong in China.
In fact, like I travel quite a bit to China to do some of my research and you
know, almost everyone is on WeChat. Is almost every billion, even multi [inaudible 16:41] than the red case
that guarded you see around us right now. So WeChat figure is almost
everywhere. And I see a lot more than the Alipay signal, which is, you know, [inaudible 16:55] on WeChat pay, but
it’s just Alipay, right. It’s a lot more or WeChat, people are attuned to
then. Yeah, that’s happening like
there’s lots more room for them to grow.
the other segment that I think is really interesting that people don’t really
pay much attention to is the venture capital off of Tencent. So you know, we
all know the spectacular failure of the [inaudible
17:15] IPO. Okay? But you know, the keeping up VCs is in how you spot those
unicorns and everyone wants to be part of the next big unicorn. Right? That’s
why we had my big valuation for Uber and [inaudible
17:26] so on and so forth.
you look at globally, right, what are the top 10 investors of global unicorns?
So Sequoia, everyone knows that by now is number one. Number two is Tencend, I
mean this is not bank. I was [inaudible
17:43] because I initially expected and I thought SoftBank would be number
two. But, you know they’ve been investing in like your JEs [inaudible 17:52], these are really and even easy to see. So this
really big global unicorns, you see them like they have a very, they’re like
the mix Uber or the mix kind of Amazon and that’s really good, but they’ve
growing really well. So I think this is another revenue contributor [inaudible 18:08] that we should not
so now I’m on slide nine. You see the whole universe of Tencent. Doesn’t it
remind you of [inaudible 18:17]?
Stanley: Definitely, is almost a hot
melting pot of everything.
Dawn: And you like you know, of
course, some critics will argue like if you have your hands in too many pies,
then you just get burnt on your [inaudible
16:34]. But back to before, otherwise, because how management have actually
organize these reminds me a lot of how Google approach is actually. So they had
lots of different stuff that they were trying out and they gave people
authority in issue like non-new product line or new ID segment that we were
testing and those people basically owned the business. And that’s exactly how Polymer
is doing it right now for Tencent.
each different vertical, in each different business unit, you have different meter
heating it up. And the focus is really laser focus on like growth and
acquisition. So I think that’s great. Because like you don’t just have one man
trying to do a lot of things, then [inaudible
19:11] you then fail. You have different people who are strong in different
areas. So I’ll talk about, let’s say their foray into thing, the financial
space as well as investments, right. So to do that, they actually hired an ex,
I think was Goldman Sachs. Right? Yeah. So he was this guy, who was the [inaudible 19:30]. He ended up [inaudible 19:32] return portion of
Goldman Sachs business and he joined them to really grow their foray into the
same tech investments and their route management space and they have been
making good program. Yeah. And then they’ve basically replicating this for like
the other business units by getting people in charge of those verticals.
there’s a lot of ownership, there’s a lot of drive to want to make sure your
business unit performs well. Right? Of course, this is so a lot of like lost
seeking best. But come on let’s be honest, Google has those as well, right, how
many projects are still in Google? How many ask their, big question mark. We
don’t know. But the key thing is in managing what do you put into your idea and
new businesses and then cutting out those if they really don’t turn profitable
or they don’t really [inaudible 20:17]
later on and then wants you focusing on your core business areas.
sum it up, if you look at this page, right, it’s humongous. They have
communications, QQ mall, WeChat, they’re really big in such, right? So who is
number three in China? Of course is not [inaudible
20:37] But I think you know, number three is also quiet, it’s not bad
because it’s one vertical, then they’re trying to grow more and [inaudible 20:43] is also slowly losing
stream as we go on, lots of competition. I am in them because they’re number
terms of games, they’re definitely just number one, no doubt about that. And
not just kind of globally, but they also link up with CJ games which is very
big in Korea. So probably you know that. And that really set [inaudible 21:02] for more growth in
this industry. You know, even my friend, Mike works for a Russian leading
company knows Tencent. He’s like, oh my gosh, I didn’t know Tencent was that
big. Like yeah, yeah. Well, you know, [inaudible
21:16] operate under so many different arms, but honestly, they’re just one
big conglomerate. You only look at the different part. You need to look at the
bigger picture, right?
you have like they try to venture into software and this is something that I
need really to watch, because it’s not performing at the best right now. But
you know, who knows what you’ll be like in the future? And there’s also lots of
ecommerce platform. So a site from JD, they’re also been making a lot of
progress into like people, also well, basically, is like a group buying
platform. So it’s very good, because it utilizes WeChat current strength. Because
when you try and do a group by, where do you share it? Let’s look at us, right.
Like when, I mean a lot of [inaudible
21:56] groups and when we [inaudible
21:59], we just promote it on WhatsApp. And it’s like specific WhatsApp groups
that at least center [inaudible 22:04]
and they already have WhatsApp interface, now just integrating and promoting [inaudible 22:08] makes perfect sense.
So I think that’s another good way they’re doing it.
also have lots of Omni channel like Didi [inaudible
22:18] which is, you know the biggest in China. You go anyway, lots of
people prefer Didi rather than the taxi and then of course, they’re also
venturing into entertainment. On social media, they try to do like mini Facebook
for different niche. Like homeo for university students and then like Qzone for
teenagers and City Elite for adult. So they’re [inaudible 22:38] these different things.
even have like a China [inaudible 22:41].
Yeah, and we also are [inaudible 22:45]
the US… So big, right? So this could be another area that we will be watching
out for to see how these future events will pay off. So if you were to sum up
all of that, I think it’s quite clear for everyone to see that they’re the largest
technology company in China plus the number one game company in the world. So
you put all of that together, they’re basically, it just means that they’re
leader in social media, gaming, FinTech, video streaming and now they’re trying
to go B2B to cloud computing as well. But just take note, their biggest
competitor here in Alibaba. So yeah, lots of competition.
Stanley: You mentioned about their
competition with Alibaba, especially now when both of them is actually much,
much bigger than the next competitor, which is of course JD and Baidu, right? I
think at least in terms of market cap, the two companies like 10 times bigger
than then JD or Baidu. But with all the different segment of Tencents, which
one would you say that you are most optimistic about?
Dawn: Multiple [inaudible 23:44] their key revenue
streams, right? Oh yeah, like [inaudible
23:50] so WeChat is a huge one. Gaming is also one of the core. They’re
also moving and trying to want to buy more advertising and I think this is just
what you need because of the existing infrastructure that you already have in
digital content, now digital content is still relatively new. I mean is only in
the last few years that we’re starting to see things like, you know, P-walls
and like [inaudible 24:13-24:18] and
a few other platform is coming up. [inaudible
24:20] is another one. So this is something new that the world is generally
shifting to and I think Tencent is in a very good position to take advantage of
that. They already started rolling it out and we should be seeing more traction
in the future.
payment platforms as well because really WeChat pay in Ubiquetious in China. Is
literally everywhere. Just take a trip to China and you’ll see for yourself,
even the beggars literally have a WeChat QR code. You don’t give them cash,
they accept cash anymore. IS QR code through WeChat [inaudible 24:53]. And then like you know because they’re on the
WeChat platform as well, they’re trying to go into your own management by
offering you investment. I was talking with some of [inaudible 24:59] in China, they’re starting to pick up, but we’re
still in the early stages. So yeah, I think all of these combined together,
lots of revenue streams that they can tap on. And of course, the biggest really
people need to watch, WeChat and its relevance and this are [inaudible 25:13]
Stanley: Right, okay. Maybe guys
just understand your history of investing in this company, how long have you
been invested in this company?
Dawn: So, I’m not investing right
now. I think since I’m mentioning, giving you guys [crosstalk 25:30]
Stanley: Wow, thank you so much. So
you’re actually sharing the idea first before you’re looking at it.
Dawn: I mean, one thing that will
be coming up is the investor sentiment. Right? And investor sentiment and then was
the lowest recently with the Chinese regulatory slowdown and started picking up
recently. And now, I’m trying to get in, you know like I have this test right
now that I want to go in with. But because of how the recent news media seeing
it’s like there hasn’t really been that much. So I’m still waiting. So yeah, [inaudible 26:05]. But I’ve been basically
it this company for at least, I think I’ve been watching it for two years
Stanley: Right. Okay. So what are
you waiting for?
Dawn: Why am I waiting for? To go
Stanley: Okay, maybe at the end,
we’ll talk a little bit about how you think of valuation and what is a fair
valuation that you want to think about. But of course, as you know, being one
of our members in VIA club, this is a company that I actually own as well and so
one of my core portfolio stock. But I feel obligated to challenge you on your
ideas since you’re bringing this idea onto our show.
Dawn: But what was the entry
price [inaudible 26:52]?
Stanley: I think compared to when I
first invested there, it has roughly doubled last since I last invested. But
going back to the stocks, right, I want to pick your brain a little bit. When
you think about tech in China, yes, they are one of the largest, but we also
seen how the government have such a strong shadow hand in the tech sector as
well. And you mentioned that in 2008, right, when they put a slowdown in the
gaming sector, it really hampered their growth a little bit. And do you see
that as, how do you mitigate that risk, you know, because no matter what they
would need the buy in of the government and we seen, actually to some of their
competitor like ByteDance especially when they are not able to control their
platform well? There are some instances where the government might come in,
actually shut down some of their projects directly. Is there something that
you’re comfortable with and how do you think of the whole situation?
Dawn: I think if you look
historically at how China is run by, you really need to have a very good
relationship with the government. And ideally, you have seen basically, those
stocks in company that have grown over the years are those that have the
support and they’re [inaudible 28:23].
So the government is like, [inaudible
28:26] right, it basically, kind of propels their growth further.
think in this part, Tencent have proven themselves to be very adept at working
with the government. Let’s just look at the recent virus distribution, for
instance. So there have been lots of problems and control people, contain the
virus. And look at Tencent did, they’re trying to go into like safety and
security checking, because everyone has WeChat on their phone, right? So they’re
trying to help the government on that and I think all of this little thing that
they’ve done over the past few years, the relationship that they’ve built place
them in a very good shape to be discussing and negotiating with the government.
think the other part is also how they basically manage their expectations and
they work together in tandem. Because, you know, like you say, the [inaudible 29:11] in China cannot be on
the wrong side. Right? This is why I’m also a bit wary to put my bets on a
smaller company that hasn’t yet had a proven track record of managing that
relationship with the Chinese, I think this. But I think on this one, Tencent
has been really good, the way they react [inaudible
29:28] Chinese… slow down. On the way they reacted in this Coronavirus
crisis, it really shows their support and partnership with the government. So I
think this is actually not a big problem. In fact, this is a better sector
helping companies like Tencent and Alibaba versus your other smaller companies
Stanley: Why do we also talk a
little bit about their financials and how do you see them? We want to share a
little bit about how you look at their financials and what’s your expectation
Dawn: Yeah, sure. So, basically,
if we were to jump go straight ahead to slide 16, right, you will see here that
I’ve actually consolidated their past few years financials. So this was quite a
bigger than money [inaudible 30:13].
So I’m just happy that they would get there [inaudible 30:17] to look at that. And we can clearly see an
uptrend, right. It’s very obvious uptrend and just [inaudible 30:25] to figures like jump in revenue. Okay. But profit
has also been quite consistent. Yeah.
see right now if you look at, Q1, Q2, Q3 for 2019 so far, I think their own
trend to having even more, right. Although, however because of this whole virus
situation that might just have some dent in their business, especially if they
push out more and I need you [inaudible
30:49]. I mean, you need pain because you can go both ways, right? You need
more but so I think with this it really depend because it can go [inaudible 30:54] right, You will stay
at home more so a bit more, but yeah, anything. So I think with this literature
and this comic slow down, there’s a cause for concern, which is why I’m not
rushing to buy Tencent right now. It actually came quite close to my target
price, but yeah, it was like just a few dollars [inaudible 31:11]
you look at their financials, their gross profit is really, really amazing,
right? Is almost half or more than that on its revenue. Net profit is also very
astounding is like, you know, [inaudible
31:27] percent, which is very, very admirable. And in fact, if they didn’t make
so much investments into like new potential business units and [inaudible 30:37] this will meet you.
So, if you look at reading [inaudible
31:41] they have office that they’re making from their business, this is
Stanley: Some people is saying that
because of the current health outbreak in China, is actually very, very good
for company like Tencent because everybody cannot go out and so they end up
playing game at home. Apart from the expectation on the growth and everything,
there’s a lot of check on how China is moving forward with 5G and the new
telecommunication movement and transition. What’s your view on that, how would
it actually sort of benefit Tencent or does it really matter to Tencent on that
Dawn: I think the [inaudible 32:30] it’s just more than,
with the most 5GSP become better, faster and I think that would even be faster.
Then it creates a bit of stickiness, because then you become more efficient and
therefore, you use your phone more as well because there’re just a lot more things
that you can do productivity level, so increase it. But I think there’s not
much of the direct impact. Yeah, [inaudible
32:54] you know, you’re just asking me as for asking sake.
Stanley: I do agree with you. I
think it will take quite a while for them to really make use of the full
potential of 5G. Especially even if the infrastructure is there, the services
that can benefit from it will have to be built up slowly as well. So definitely
it’ll help. Tencent would build the better connectivity and better speed. Maybe
Tencent will end up innovating more and more services that you can do online,
which you cannot really do with 4G right now, right, especially on real time,
data transfer and things like that.
Dawn: Okay, you know, interestingly,
China has already announced that is already starting [inaudible 33:37] 6G… But anyway, so like [inaudible 33:43] with the cloud infrastructure business and they’re
slowly winning away market share from Alibaba and the other competitors. That’s
another field that we want to watch. So Tencent is also trying to transform
away from the consumer, is that [inaudible
33:56] B2C segment, right until [inaudible
not moving forward. They want to go down the industrial internet path, which is
where I think the Western world move towards as well. So that’s a good portion
where it will be directly affected by 5G.
Stanley: In your mind, what could go
wrong for this company? Because you talk about how well they have been growing,
how well their relationship is with the Chinese government and so they have
kind of have the support of the government as well. And, you know, they have
such so many different sector and when I ask you which are the sector that
you’re optimistic about, you actually every single sector that you’re very
optimistic about them. But so what could be the problem with this company that
we have to look out for? What could go wrong?
Dawn: Yeah. I think so if we were
to [inaudible 34:49] you’ll see
that, down the risk I foresee for this company is in the competition. So
competition-wise, right, the gaming sector, they believe watch out for folks
like Nicki. But in [inaudible 35:04]
they’re also, like they’re quite smart even though is right. So they’re to do
partnership with [inaudible 35:07] their
market leading position.
this is something that we want to watch, because when the competition starts
eroding, if their future games are not as well received, then it’s really up to
them to see how they actually take that feedback and transform for the [inaudible 35:26]. It’s just like I did
example. In the past few years of this thing, right, lot of people, their
sentiments are quite negative at some point because like the quality of stuff
that the [inaudible 35:36] they just
believe they can get. And then they basically took over pizza and they started
revamping it and became full authority, full freedom, creating freedom for
pizza. And then now you see your huge launches like [inaudible 35:50] and everyone [inaudible
30:52] and then their valuation coming up again.
think that’s something that we need to watch. So investors understand, should
be wanting to [inaudible 35:58] but
regularly to identify how the competition is doing and then decide like is
Tencent investing, right is not like maybe still like [inaudible 36:08] .
would be the slowdown in PC game. So I think Tencent knows this as well, right?
And they’re moving more towards like mobile gaming, mobile apps. So I think
this kind of offset that. But this overall is a war and industry issue that
everyone is trying to grapple with. I think [inaudible 36:31] basically faces the same kind of challenges. So
we want to be watching this and see how successful Tencent is in moving into
mobile gaming and really winning over more market share.
regulators like you mentioned are another one. So I think there’s a lot more
concern now. Because like, you know, they’re worried about the impact of the
games on the Chinese youth, because you know, communist country censorship,
right? So how would Tencent be add to that? Will they launching and innovating
more games, they’re [inaudible 37:04]
that’s like, you know, transforming [inaudible
37:05] and teaching socially acceptable values and basically, winning over
the [inaudible 30:09], extremely fun
to engage it. That’s something that we want to see. So how do they recruit talent
is also another key thing, right?
course, then there’re also on the [inaudible
37:20] portion, this is the part where, although I’m optimistic, I’m also,
I’m cautiously optimistic. Right? So I wouldn’t say like, [inaudible 37:28] I’m cautiously optimistic in some of these
verticals. Because let’s face it, it faces very strong competition from like
your ByteDance and Baidu. But if we look at how they’ve been faring so far, let’s
just say, everyone [inaudible 37:46]
being quite successful is stealing away by good market share, even for
would say, continue watching it, but the good thing is that Tencent already has
an infrastructure to benefit more from advertising than its other competitor if
they manage it [inaudible 38:01] now.
then for cloud services, well, that’s a big growing industry. The question is will
Alibaba continue to be number one? Or will there be enough space for the full market
to grow? So I’m of the view that, the whole market will grow. It’s like to see
more companies requiring cloud services. And because of what Chinese regulators
are doing against US companies, it’s not [inaudible
38:23] to penetrate. Just look at how Apple and Facebook have been having
difficulties and even Microsoft. So I think that actually will help to grow the
industry on the full and there’s more than enough room for more than one player.
So these are the risk that we will be watching for.
of management, which is another key reason many Asian listed companies, the
good thing is that their restructuring, so they’ve gone through many rounds of
restructuring in the past. But right now, because of the way they give
ownership with the different business units and the leaders leaving… each, I
think even not really much of a key language unlike some of the others, right?
And you know, you kind of like with Alibaba, you have to always have a very
attractive CEO. With Tesla, you have Elon Musk. Taken they don’t really have
that pony [inaudible 39:12], right,
but he doesn’t really have that much trauma of queue to other, to like to best
company out there compared to these other people I’ve mentioned.
even the [inaudible 39:24] want to
step down which I don’t think he will in the near future. Like I don’t need too
much money. And we’ve seen this recently, right. We saw the news. He recently
sold some of his share, although is 20%, so I don’t know why there’s so much [inaudible 39:37]. But anyway, so he
sold quite a bit of his share to raise up several hundred million dollars. Recently,
he cited it was for like personal reason. So it’s really not much. And the
market barely know that [inaudible
39:50-40:00]. So yeah, I think these are some potential risk to look out
for, but yeah, Tencent mitigating quite well.
key question, I think the biggest risk that we need watch if [inaudible 40:11] that’s in all these
other smaller sectors. See, and they bring in so many things. But the problem
with a lot of these other companies are also lost thinking. So how long more will
they continue to run into mitigate? Because if they keep just building a profit
from like its scaling [inaudible 40:26]
all of these companies, then that’s [inaudible
40:29] in a long run. So we need to really keep an eye on how they manage this
whole ecosystem, and this is really is the problem that Google is facing.
Stanley: Okay. Wow! I think you have
done a very, very deep analysis on the company. Of course, the most important
question to the end is talking about valuation. You mentioned this now that the
company nearly hit your target price and you almost got to invest in it. But
how do you derive the valuation of this company and how do you come up with a
target price for this company?
Dawn: Okay. So a few things I
look at would be cash position, right? So Tencent has a pretty healthy cash
position, although it has a lot of debt because of all [inaudible 41:18] investment. But in growth companies, I think
that’s where the challenge lie. It’s very hard to pinpoint a good valuation of those
company, because you kind of have the fact that [inaudible 41:30]. And even models like VCs, I don’t find very
useful because you are kind of projecting a constant [inaudible 41:38] and we make several assumptions in that module
for you to arrive at a number. But that’s not something that I feel is really
applicable to growth companies because they don’t really operate that way. The
core could be like that rather than… Right?
I [inaudible 41:55] is really looking
at historically where has its price levels been at? I look at it from like your
entire range, either you’re thinking on all base these on Google Stock pricing
as well as the one year pricing. And I tried to look at the valuations. So I
think for Tencent of reasonable valuation, that I’m willing to pay for would be
anywhere in the 50 times PE.
Dawn: But the problem is, you
know, like right now, is 20 plus, that’s why I couldn’t buy more. What’s my
target price? Like basically, I was like eyeing like [inaudible 42:29] 300.
Stanley: Right, okay. What’s
happened is it never really hits your target price? Is something that you don’t
mind just giving it a miss? How do you think of investing in such a growth
company? Because for me, sometimes what I do is, even if I feel is very
overvalued, I might also invest a little bit a small position to get started
with. For example, for Tencent, I remember when the first time I invested my
first investment into it, I bought it at around 60 plus PE, but you can see
that it’s very overvalued. But it turns out that on hindsight, is actually
still quite a good decision. But do you feel that because you have quite a
tight target price that you want to invest in, would that lead you to have a
lost opportunity in this company in the future?
Dawn: Yeah, of course. I mean,
that’s the same challenge that I face, right? It’s like you asking myself,
should I readjust my time, right? Because I’ve been looking for at Tencent even
before, but it’s like well, for quite a few years, even when I’m pregnant. And
you know, honestly, I really miss [inaudible
43:48] Tencent stock price went on a huge decline because of all the
sentiment in 2018. But regular readers will remember that was one of the most busy
because I gave birth in November. You know, coincidentally, like a few weeks
before I gave [inaudible 44:06],
literally two weeks before I gave birth, can you tell me lowest price of [inaudible 44:09].
Stanley: You’re still monitoring
Dawn: I know, even know the
valuation at a point, because it’s like I didn’t really calculate it back then.
Because honestly, I mean, I’m doing [inaudible
44:21-44:26] writing. But you know, 2019, I already wanted to go in for at the
$300 level, because I think valuations at that point were ranging and unhealthy
[inaudible 44:38]. And I was very
comfortable paying for that given the overall speed. But you know, it really is
a challenge, because I think I shared with you last time we met. The problem
with investing sometimes that you also have to be in the right place at the
right time. And I was not in a very good in 2019 as well, because I’m coping to
my new role as a mother and honestly, I think I think I only bought like a very
small handful of stocks in that year, because I didn’t really have much time [inaudible 45:05]. More so busy, you
know, your kids like crying [inaudible
45:09] threehours. You need to
think like trying to feed them, how to wean off, what school to send them to,
what [inaudible 45:14] like mentally,
I was just very overwhelmed. And that’s why also like that was when my
investment strategy started to shift more out of.
to go for the very like, you know, like the more smaller company that you
really have to monitor, but they have huge potential. Because if you really,
like you know, if you watch them and you get in and out fairly, okay, I mean,
right? This really gives you [inaudible
45:46]. But then I got [inaudible
45:47] on one because like I shared with you. Their price literally dropped,
like a short night and I didn’t even want to hear [inaudible 45:52] I think like one week in there. Had to react by then.
It literally went down to huge double digit, drop and like, I was like, no at
the point, I might [inaudible 46:03] anyway.
So I think my approach towards growth companies, right is generally to keep
adjusting the valuation and the price that I’m willing to pay for.
this point, the reason why I am not a big fan of [inaudible 46:18] right now is because the sentiment is too
positive, right? Everyone is betting that because of the virus, everyone is
staying indoors and [inaudible 46:26] than
they will want to benefit from it. The last only result, the basically, the result
has expectation and these are generally times that I do like getting.
Stanley: Right okay.
Dawn: Wow, I prefer to wait for bad
news. And [inaudible 46:44]. That’s
when you have a chance to go in on growth stock. I didn’t [inaudible 46:48] for Facebook. Facebook is obviously like, its
growth trajectory is there. But in the last few years, there’s been certain
point, right where, it was even better because of the whole Cambridge Analytic scandal
as well as you know their privacy breaches and all. And that point of view and
that, right also really, really [inaudible
47:06] that needs to go in.
give you another example just [inaudible
47:11] prospecting about the future of [inaudible
44:13] now where once like wow, Disney plus is coming out, they’re going to
be like [inaudible 44:19] Netflix. And
if you bought in, right, like you know, I mean the stock prices historically
show you. So my approach with growth investing is we need to look at the
sentiment which is a little bit hard in case, you really can’t be very sure. But
I think that’s a [inaudible 47:32]
on growth investing, right? You can go inexpensive. If you’re [inaudible 47:36] you basically, what
I’ll do is I will provide [inaudible
for me, I like to divide not [inaudible
47:47] big trenches, but also because like if I’m very big on one stock,
right, I tend to put a lot into it and then I divide it accordingly. So I would
adjust my valuation as the company grows and I’ll add more [inaudible 47:59] are there and I’ll avoid it entirely when sentiment
are good. Alright, so I mean what made you buy Tencent [inaudible 48:06]?
Stanley: On hindsight, of course, it
feels like it’s a good choice. But at mobile time, you never really know.
Right? I think I went through a similar transition, such as you. Where at the
beginning, I was very much a value investor looking at, you know, very cheap
stock and having to monitor them very seriously. Tencent is more of the stock
that really make the shift into more of a long term, a fundamental growth
investor. And this is really something that I kind of go out on a limb on just
trying, because that was the first growth stock that I bought and I completely ignore
the valuation part of it, just focusing on the fundamentals because I’m trying out
from the experience, it gave me the confidence that this kind of strategy
actually works if our timeframe is long enough and if the company is really
fundamentally strong and growing very aggressively. And from there, I was able
to gain comfortable in investing in more other kinds of growth stocks along the
way as well. Thank you so much, Dawn, for sharing, you know, so much insight on
this company. Do you have any closing statement for Tencent?
Dawn: I think like we’ve been
saying, like difficult part about investing in growth is very hard to pinpoint
a good price to good valuation. That’s why like, you know, it’s really not for
the [inaudible 49:39] investors. If
you want a mathematical formula, like you know, someone will tell you, oh you
do is, divided by this and then times this and that’s where you get price,
you’re not going to find that in growth stock. Because how do you put a price
on the future? I foresee a lot of different roles that we want to be watching. So
gaming is one. How they monetize WeChat further? So WeChat pay is great. But
how are they aiming to increase their margins? Because they’re almost everywhere
now, right? So you go everywhere and next thing is how do you make people, like
you already have their audience, how do you own most of this audience? And
that’s the problem that Tencend is facing right now.
doesn’t act [inaudible 50:16] as
well, how would they be able to stand out and really change the WeChat platform
to be more friendly and [inaudible
50:24] advertisers? So that’s something that I’ll be watching quite
closely. In the cloud space, I mentioned, they’re not fantastic at B2B not as
good as Alibaba. But I think the whole market and the whole industry can grow.
So we want to watch that.
as well is another good part. So this is a growing industry. Everyone knows
that in China, most people are under-insured or not even insured. So this is a
huge market and I think Tencent is well placed to tap on it, although a lot of
competitors are also trying to go into it. In the area of health as well and
education, they’ve also been making a lot of key partnerships. Like did you know
that Tencent actually partners a legal for its education arm?
Stanley: Wow, really!
Dawn: So, a lot of people also don’t
know. You see, right. So I put [inaudible
51:10] this is really like fairly new. If you look at the US market, right,
there was a Spotify SEC falling that was posted on February then and I think [inaudible 51:23] ended that well. And
he shows that at that Tencent owns 9.1%% of common stock in Spotify. So that’s
actually quite interesting, right? Because they all like more than, they
control more than 16 million shares in Spotify as of the end of last year and
then we try and look at how Tencent Music Entertainment Hong Kong is coming in
and then how they are basically leading entire consortium, they’re trying to
buy over Universal Music Group at least 10% of it. So could music also be a
very big shift for Tencent in the future? There’s something we don’t know.
it’s very interesting because like, you know, if you don’t really look at all
these different factors, it might quite [inaudible
52:05] like piece the puzzle together. But the fact show that Tencent already
now has 9.1% in Spotify and that’s largely owned by Tencent Music
Entertainment, the Tencent mobility, [inaudible
50:17] investment, we want to be looking at these for its stake in Spotify.
And we all know Spotify is also growing in the music industry. In the future, we
don’t really have CDs, [inaudible 52:33]
from Spotify. So it’s actually another good avenue for us to look and we want
to be looking at whether these future bets will pay off.
that’s something that we need to kind of factor into the valuations that we try
to figure out what kind of price we’re willing to pay for. Alright? And then
they’re also working very closely with the government for the education sector.
So we really try and look down the literature down there out there, right. Because
of how they’re working to [inaudible
good right now, there’s a lot of, in only moments of crisis, then you find good
opportunity. And Tencent has not been performing extremely well since 2018. I
think during this period is great. But I’m cautious to start with you right
now, it’s because sentiment is too quite optimistic. And anyway that economy
slow down, you really don’t know what will happen when the economy slows down.
And it’s all about opportunity costs. Because if you have 10K and you put it in
Tencent, you could have actually put it in another stock that happens to be cheaper
than Tencent at that point in time in the stock market. So this is something
that I would consider and think about before I make my move. Which is why [inaudible 53:53] on a slide.
sum it up, my investment thesis for Tencent and why I like it so much it’s
really because it’s the six strongest brands in the world. And we’ve seen
historically that brands are very strong [inaudible
54:06] more that is very difficult to be [inaudible 54:07] and Tencent knows this, right? So that’s really
keep trying to build up more than one good way. It’s not just, you know, Tencent
is a parent company, but no one really had that loyalty to Tencent, right? [inaudible 54:21]. When that they’re
really trying to push up. Right? And then they’re market leader in so many
have a very strong [inaudible 54:30]
and their business model, why I like it’s so much is because that’s the key. [inaudible 54:35] because WeChat has so
many stuff into it… to make you want to stick around. You’re less inclined to
change to another messaging app, which is why like you’re so sticky on WhatsApp
as well, [inaudible 54:47]
kind of don’t really change once you’re in it because it’s a network effect. All
of your friends and almost the entire China is on WeChat [inaudible 54:56] messaging app coming over, right? So yeah, not
much competition over there. And then it’s also a very good high quality and
diversified technology giant as you very really reminds me a lot of how Google
was in its early days and most importantly, right, the gross profit margins are
want to backtrack [inaudible 55:15] you
will see the segment gross margin, but then, is very high, in their [inaudible 55:25] segment right? This
is like 50 to 60%. Yeah, on my advertising, this is like 40+%. Could there be
more? Yeah, the market controlling, the new market so we don’t know yet.
one that is not so great in comparison is FinTech and business to business, but
because that’s very new, is Tencent new for me, but [inaudible 55:45] they’re already at 20 something percent. In terms
of other companies in other stocks, right, you’re doing a series called gross
margin for that industries that you’re [inaudible
55:54]. Putting Tencent in a very, very good place right now, I guess,
maybe why I’m really hopeful about its future and I will keep looking to add
more. And I think what’s going to happen, Tencent, they are going to keep [inaudible 56:08]
Stanley: That’s great. That’s great.
I can really see the amount of effort and research you have done into this
stock and is amazing you are sharing with us and including sharing some of your
mistake on your previous investment. I really hope one day you will be able to
find Tencent within your portfolio and find a target price that you are comfortable
with and happy with that you can start investing into this wonderful company.
if you guys want to see Dawn’s full presentation, I’ll put a link down below so
you can download it. And so this is Dawn founder of SG Budget Babe. I will also
link her website down on the show notes so you can maybe connect with her and
discuss more about Tencent or other stock that she might be owning as well. [crosstalk 57:02]. Yeah, definitely. Yeah.
once again, thank you so much Dawn and I hope that maybe you come on to our
show next time as well. Thank you so much.
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Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.