#13 INVESTING IDEAS – Tencent Holdings (HKG:0700)

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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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.

This 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.

From ValueInvestAsia.com, 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.

But is 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 investment.

So, 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 started.

So I 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].

But I 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.

Because, 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 landscape?

So 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 space?

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.

So 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. 

So I 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 portfolio?

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.

But 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.

And so 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].  

But 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.

And 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.

And 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.

And 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?

So, 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?

So I 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?

So, on 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.

So if 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.

And 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.

And if 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 neglect.

Okay, 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.

So in 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.

So 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.

So to 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 one.

In 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?

And 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.

They 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.

They 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 place.

And 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.

The 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 already.

Stanley: Right. Okay. So what are you waiting for?

Dawn: Why am I waiting for? To go down.

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.

And I 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.

But I 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 like ByteDance.

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 on it?

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.

And I 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]  

So if 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 very sticky.

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 transition?

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 33:59].

But 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.

So 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.

So I 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] .

The challenge 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.

Chinese 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?

Of 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 ByteDance. Right?

So I 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.

And 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.

In terms 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.

So 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.

The 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?

So how 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.

Stanley: Right?

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 Tencent price.

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.

I used 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.

So, at 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.

I’ll 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 47:40].

But 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 something new.

And 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.

It 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.

Insurance 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.

But 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.

So 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 53:03]

I feel 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.

But to 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 sectors.

So they 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]

You 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 really good.

If I 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.

The 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.

And so 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.

So 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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