Prosus’ market cap & holdings of Tencent (in mid April 2024)
As of mid April 2024, Prosus’ share price was ~EUR 28.5. With a share count of ~2.49b, its market cap was ~EUR 70b or ~USD 75b. That market cap was less than the value of Tencent’s shares (2.3b shares) held by Prosus, of ~USD 89b.
Since the big bulk of Prosus’ value is in its holding of Tencent, in this updated article, let’s take a quick stocktake on Tencent’s latest financials up to year 2023, to see how Tencent has been performing quantitatively, and its latest valuation.
Disclaimer: In this article we have just focussed on the quantitative aspects and have not delved into some of the qualitative risks that businesses in China have been facing…so it is important to note that a low valuation does not automatically translate into ‘attractiveness’.
Tencent’s ROCE
Tencent’s business mainly comprises its operating business, and a portfolio of listed and unlisted investments (recorded in its balance sheet as mainly: associates, available-for-sale financial assets (accounted through, either profit or loss, or other comprehensive income) and minor joint ventures).
The nature and accounting for the operating business and the investment portfolio are very different, so a good way is to look at these two segments separately.
Thus, to examine the ROCE for Tencent’s core operations, we have to look at the ROCE based on a capital employed base that excludes all the investment amounts, i.e. the orange line in the chart below (instead of its overall ROCE, i.e. the blue line in the chart below).
Notes: (1) The operating profit used in the ROCE calculations excludes interest income, and “Other gains, net”.
Per the chart above, although its ROCE for core operations has been decreasing over time, it was still at a pretty high level, at 27% pre-tax (including goodwill) for the year 2023, although that’s something we have to monitor closely to see if it continues to trend down in the future.
Note that we focus more on its ROCE including goodwill (instead of excluding goodwill), to be more conservative, and also because Tencent has been pretty acquisitive every year to support its core operations.
To provide some numbers, at end 2023, Tencent had goodwill amount of RMB 126b, arising mainly from its acquisitions of various companies related to its core operations, like gaming companies (e.g. Supercell (~RMB 59b+), and Leyou (~RMB 6b)), online music businesses (CMC (~RMB 16b+), and streaming companies (Huya (~RMB 5b+))), etc.
For its investment portfolio, we will look at its performance later on.
Tencent’s margins & asset turnover
On the individual components affecting the ROCE, the profitability margins of Tencent have been decreasing since 2009, although they have recovered quite some in 2023. The GPM has been dropping, mainly due to a revenue mix shift to lower margin segments (i.e. online advertising, and fintech & business services), and decreasing GPM for the value-added services over time.
In 2023, the GPM recovered to 48%, while the OPM recovered to 26%.
The good news is that the individual GPM for the different segments have been recovering/ improving, per the chart below.
Coming back to the components affecting the ROCE, although the OPM in year 2017/2018 and 2023 was similar, the ROCE was lower in 2023 (27%, vs 40+% previously), due to a lower capital employed (CE) turnover, which dropped from ~160% to 105% in 2023, partly due to the increase in goodwill (from acquisitions) and accumulation of cash on its balance sheet.
Tencent’s balance sheet strength
Over time, Tencent had been reducing the amount of net cash held, so that’s good (in terms of not diluting shareholder’s return by hoarding cash), where it had been trying to maintain a similar amount of cash and debt.
Tencent’s capital allocation
On capital allocation, on the use of operating cash flows (OCF) (before deducting SBC expenses), during the period 2009 to 2023, Tencent generated an OCF of ~RMB 1.3 trillion. Of that, it:
Reinvested ~71%, spending 34% (~RMB 450b) on capex (on both tangibles and intangibles, generating good ROCE), and 37% (~RMB 487b) on acquisitions & investments; and
Returned ~14% back to shareholders, through cash dividends (8%, or ~RMB 100b) and share buybacks (6%, or ~RMB 80b). This was on top of the dividend through distribution in specie for its previous shares in JD.com and Meituan, in around year 2021 and 2022 respectively, which was worth ~RMB 85b and ~RMB 116b respectively.
Per the chart below, in recent years, it has been spending less on acquisitions/ investments, and returning more of its capital back to shareholders, with share buybacks increasing in 2022 and 2023, to ~1.0% and ~1.6% of total shares respectively, at an average buyback price of ~HKD 316-325 in each year.
Overall, it’s good to see that Tencent has been:
reinvesting a large portion of its capital to grow, through capex and acquisitions/ investments, generating decent ROC; and
returning excess capital (and not hoarding them) back to shareholders, with it planning to at least double the size of its repurchase in 2024 (from ~HKD 49b in 2023 to >HKD 100b in 2024 (which was equivalent to ~3.5% of its market cap in mid April 2024)).
Tencent’s investment portfolio performance
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Tencent’s valuation
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