Tencent’s six reductions

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Text / Principal, Chen Meixi

Source: Hedgehog Commune (ID: ciweigongshe)

On August 16, 2022, some media said that Tencent would sell most of its Meituan shares. Affected by rumors of a reduction in holdings, Meituan’s share price once fell by more than 10%.

It is not only the securities market that is affected. In the afternoon, the topic of “Tencent plans to sell all the shares of Meituan” rushed to the top 10 of Weibo’s hot search list. Soon, Tencent responded, “Shanghai Securities Network”, 36kr and other media organizations contacted relevant people close to Tencent, and the answer given by the other party was: “The rumors are not true, Tencent currently has no plans to sell Meituan shares. “

A gossip can cause an uproar because Tencent has completed a reduction in its investment in many listed companies in the past year, including Internet e-commerce giants such as JD.com and Sea, as well as offline retail companies such as Heilan Home and BBK. . Everyone is speculating whether Tencent is determined to lose weight in the investment field. Under similar conjectures, “reducing its holdings in Meituan” has become a rumor that fits the speculation.

However, “to lose weight” is a general and abstract reason. When entering the market, it is all because of optimism, but the situation when reducing holdings is very different. Hedgehog Commune (ID: ciweigongshe) looked back on Tencent’s six reductions in listed companies in the past year, trying to find reasons for Tencent’s entry and exit outside the abstract “slimming”.

“Expensive” Hailan Home

In October 2021, Tencent reduced its stake in Heilan Home from 5.52% to 4.99%. Don’t underestimate this relatively modest reduction. According to the relevant regulations on information disclosure in the domestic stock market, once a shareholder’s shareholding is reduced to less than 5%, it is deemed to have withdrawn from the ranks of major shareholders, and then the shareholding is reduced, and information disclosure is generally not required. This gives investors relatively greater freedom of action and is less restricted by information disclosure regulations.

One fact is that in May 2022, when the Secretary of the Board of Directors of Heilan House responded to the investor’s question “Is Tencent still a shareholder of the company”, he did not answer yes or no directly, but pointed out that Tencent is no longer a major shareholder with more than 5% of the shares. shareholders, therefore “its reduction of holdings is not within the scope of disclosure”. No comment, reasonable and legal.

The cooperation between Tencent and Heilan Home began in 2018, when Heilan Home was in full swing. In February of that year, Tencent invested nearly 2.5 billion in Heilan Home, and will also cooperate with Heilan Home to build an industrial investment fund that plans to raise nearly 10 billion funds: Focusing on the strategic goal of Heilan Home, investing in the clothing industry chain And excellent clothing brands and so on.

Some analysts believe that the investment in Hailan House at that time was part of Tencent’s “staking” in the new retail field. Around 2018, Tencent deployed in new retail companies such as Vipshop, Yonghui Supermarket, Wanda Commercial, Carrefour China, etc. In this long list, there is also Daily Youxian, which has just bid farewell to us.

With food and drink ready, it is natural to invest in a large-scale clothing company. Heilan House is not just a (no money) man’s wardrobe. It has layouts in women’s clothing, fast fashion, high-end business men’s clothing, children’s clothing and other subdivisions, and has opened thousands of stores all over the country. In 2018, when Tencent invested, Heilan Home had more than 6,600 stores, with an annual revenue of 19 billion yuan and a net profit of 3.455 billion attributable to shareholders of the listed company. In the national apparel industry, Hailan House belongs to the first echelon, and its revenue is almost equivalent to 2 Bosidengs at that time.

It is worth noting that Ali also conducted in-depth cooperation with the clothing company Peacebird around 2017. It is more logical for Tencent to find the “benchmark” of Hailan Home.

But people’s calculations are not as good as the sky’s. The investors of that year could not predict the huge impact that offline retail and physical industries will usher in after 2020. Compared with Peacebird, which embraced e-commerce early, Heilan Home is a company that pays more attention to offline stores. Even in 2020, the number of its stores has still increased by more than 200.

This also led to a 44% drop in net profit for Heilan Home in 2020, the largest drop in profit since its listing. Coupled with the old problem of its high inventory and the new problem of “whether it is abandoned by young people”, Tencent finally chose to “cut the meat” in October 2021.

It now seems that Tencent’s reduction of its holdings is quite wise-compared to now, if it did not run away at that time, it would have suffered more losses.

Jingdong, which “reduces holdings but does not reduce cooperation”

Two months after the reduction of its holdings of Heilan Home, Tencent suddenly announced at the end of 2021 that it would reduce its holdings of JD.com, giving its holdings of JD.com shares worth about 130 billion Hong Kong dollars to Tencent’s shareholders in the form of “in-kind dividends”. After the reduction was completed, Tencent’s stake in JD.com was reduced from 16.9% to 2.2%, and Tencent President Liu Chiping also resigned from the ranks of JD.com’s directors.

Although on the same day, JD.com made a special announcement to explain that the partnership between JD.com and Tencent would continue, many people regarded the reduction of Tencent’s holdings as the breakup of the two giants: in the future, you can still enter JD.com at the WeChat shopping portal. , Do you buy Jingdong products?

At the end of June 2022, Tencent and JD.com announced their third strategic cooperation agreement: the two parties will focus on physical e-commerce portals, cloud technology and cloud services, membership systems, online conferences, corporate services, smart retail, and advertising. Cooperation.

Compared with the two strategic cooperation agreements signed in 2014 and 2019, the cooperation between Tencent and JD.com in 2022 has entered the supply chain and technology level, and its depth has surpassed the previous levels of traffic entry and advertising.

This also shows that although Tencent has reduced its holdings in JD.com, the general direction of its strategic cooperation with JD.com has not changed. According to Tencent’s investment logic of “supporting and sharing the growth of the invested companies and exiting when the invested companies can raise funds for their own future plans”, when JD.com had already grown into the only two giants in the e-commerce field, it also It’s time for Tencent to leave.

There are also views that Tencent’s reduction in JD.com may be related to “anti-monopoly” regulations. Before Tencent reduced its stake in JD.com, the merger of the two leading live broadcast platforms led by Tencent was rejected. Withdrawing from JD.com may help Tencent get out of the risk of being “anti-monopoly”.

But in any case, Tencent’s reduction in JD.com does not mean that Tencent reduces its cooperation with JD.com. Compared with Hailan’s home, JD.com is so important to Tencent that I don’t know where it is.

“Financially underweight” Sea

The money lost at Heilan House, Tencent has earned back dozens of times from its investment in Sea, the parent company of Shopee, the “small Tencent in Southeast Asia”. In January 2022, Tencent reduced its 2.6% stake in Sea, realizing $3.2 billion, equivalent to 200 “small goals”.

In addition to the shareholding reduction, Tencent’s voting rights in Sea will also be reduced to less than 10%. In fact, Tencent’s voting power in Sea has been decreasing, from 29.1% in 2019 to 23.3% in 2021. There is a view that Tencent is “returning power to Li Xiaodong” (the founder of Sea). Geek Park quoted Sea investor and He Capital (Hong Kong) executive director Chen Da, saying that Tencent’s reduction of Sea’s shareholding is not bearish on its prospects, but wants to return the control of the company to the management headed by Li Xiaodong. Floor.

Tencent also said when it reduced its holdings of Sea, “As Sea has significantly expanded to become a leading global consumer Internet company, this move will help to further clarify its capital structure, which is in line with long-term strategic interest growth.”

For Sea, after Tencent reduced its holdings, its stock price continued to decline, dropping nearly 30% in two weeks, falling below 100 billion US dollars; and now Sea’s stock price is even more unsatisfactory, only more than 40 billion, and its business is also Showing signs of fatigue: The e-commerce Shopee is undecided, and the game business growth is sluggish.

But Sea’s fundamentals remain solid.

On August 16, 2022, Sea released its second quarter 2022 financial report, showing that its revenue reached $2.9 billion, a growth rate of 29%; gross profit was $1.1 billion, a growth rate of 17%. Especially for its e-commerce platform, the synchronous growth rates of core indicators such as GMV, number of orders and revenue were 27%, 41%, and 51% respectively.

In contrast, it has been difficult for other mature e-commerce platforms to replicate Sea’s growth rate. And if this strong growth momentum can be maintained, Sea has the hope of returning to a market value of $200 billion.

In the short term, Tencent “sold less” this time. However, if Tencent is a friend of time and takes a stake in Sea, there is hope for greater gains.

Reduce BBK, weaken new retail

Tencent’s stake in BBK also happened in 2018, which was less than 3 months before and after Tencent’s stake in Yonghui Supermarket. At that time, this series of actions was seen as one of the signs that Tencent was determined to compete with Ali for the offline new retail scene.

Backgammon refers to the Backgammon Commercial Chain Co., Ltd., which is called “the first private supermarket in China”. It has nothing to do with the backgammon who does some reading pens and mobile phones, but uses the same name.

Backgammon supermarkets are not well-known in the north, but in the southwest, they are the dominant offline retailer. From 2017 to 2018, BBK, which has more than 300 offline stores, is undoubtedly a high-quality target for Tencent to cast a net into new retail.

The rich offline channels and supply chain resources of the old supermarkets, superimposed on Tencent’s rich traffic resources and means of reaching, this is a story that looks beautiful. But after trying to integrate, whether it is Backgammon, which wants to use the power of Tencent to expand online e-commerce channels, or Tencent, which wants to use the power of Backgammon to seize the offline retail scene, they all find that the story is not as simple as imagined.

On April 19, 2022, Linzhi Tencent Technology Co., Ltd. reduced its holdings of 8,639,100 shares through a block transaction. After the reduction, its shareholding ratio in BBK dropped from 6% to 4.999993%. The average price of the reduction was 9.75 yuan per share, while when Tencent purchased BBK shares in 2018, the average price was 17.11 yuan per share, and the loss ratio was about 43%.

However, under the premise of weakening the overall layout of new retail and consolidating businesses such as games and social networking, the investment in BBK has lost its original value. On the other hand, BBK’s overall operating conditions are also challenged. In 2021, BBK will close 52 stores, and rumors of a broken capital chain and arrears of payments to suppliers are rampant. Officials have to respond and clarify the news of the closure.

Reducing its holdings in Backgammon, Hailan Home, etc. is only one of Tencent’s steps to weaken the new retail field.

Running out of New Oriental

Tencent and New Oriental formed a relationship in 2016. At that time, Tencent invested nearly 400 million Hong Kong dollars in New Oriental, and the cost per share was about 4.42 Hong Kong dollars. After the listing of New Oriental in 2019, the stock price once soared to HK$43.45 per share, allowing Tencent, the second largest shareholder, to gain nearly 10 times the floating profit.

However, after the education and training industry ushered in the “double reduction” policy, the 10 times floating profit turned into a floating loss of 36%.

Previously, K12 education and training was one of the important areas of Tencent’s investment. In addition to New Oriental, there are many education and training institutions such as Yuanfudao, VIPKID, Huohuasi, etc. have also received large amounts of financing from Tencent. After the “double reduction”, Tencent had to accompany education and training institutions through the pain of transformation.

New Oriental is the case of the successful transformation. In June of this year, Dong Yuhui and other former New Oriental teachers’ Dongfang selection live broadcast room began to become popular on Douyin. Because they are good at integrating knowledge such as poetry, poetry, human geography and other knowledge into product explanations, these teachers are called a dimensionality reduction blow to the anchor industry.

Along with the number of fans in the live broadcast room, there is also the share price of New Oriental. From June 10 to June 16, New Oriental’s share price rose by more than 500% within a week, reaching a maximum of HK$33.15 per share. The average price of Tencent’s reduction is HK$9.65 per share. Although it is far less than the high price in 2020, it has achieved a gain of 118% compared to the cost price at the time of investment.

For an education and training enterprise, this is simply a miracle.

It is not only Tencent that has withdrawn from running. Foreign institutions such as Morgan Stanley and JPMorgan Chase also choose to reduce their holdings at this node. Among them, Morgan Stanley reduced its holdings by 72 million shares around June 15.

The reduction of Huayi Brothers does not mean that the entertainment is not optimistic

Tencent’s most recent reduction in its holdings occurred in early August, when Tencent reduced its stake in Huayi Brothers from about 7.94% to 4.99% through block trading and participation in refinancing securities lending.

In the four years from 2018 to 2021, Huayi Brothers lost money every year, with a total loss of more than 6.4 billion yuan. Among them, Huayi has released the “2021 Annual Performance Forecast” in early 2022. It is expected that the net profit attributable to shareholders of listed companies in 2021 will be 22.5209 million to 33.7139 million yuan, releasing a signal that the company will turn losses into profits. But in the annual report released three months later, the actual loss was 246 million.

Behind the continuous losses is the weakness of Huayi Brothers in the field of film investment and production in recent years. In 2021, although Huayi also participated in the investment of the hit movie “Hello, Li Huanying”, the actual investment ratio was very small and the income was limited; and the movie “The Order of the Samurai”, which competed with “Hello, Li Huanying” in the Spring Festival. ” is the movie that Huayi Brothers voted for, but unfortunately the latter only received 270 million box office.

However, “The Order of the Samurai”, which received a box office of 260 million yuan, has been able to squeeze into the top 5 of Huayi’s film and television entertainment section. In the other 4 films, the online drama “Differences” directed by Feng Xiaogang cooperated with iQIYI, “The List of Treasures in the Middle Game of the Antique Game” directed by Han Qing cooperated with Tencent, “Midsummer Future” and “Warm Hugs” ” is also a theatrical film.

According to the statistics of Maoyan Movies, the box office of the three films “The Order of the Samurai”, “Midsummer Future” and “Warm Hug” totaled 1.523 billion, while in 2017, only the box office of “Predecessor 3: Goodbye to Exemplary” alone was There are 1.941 billion.

Whether as a partner or as an investment target, Huayi Brothers today is no longer Tencent’s best choice. The reduction of Huayi’s holdings does not mean that Tencent will shrink its investment in the entertainment industry. In fact, Ningmeng Film and Television, which was listed on the Hong Kong stock market on August 10, and Bona Pictures, which will be listed on the Shenzhen Stock Exchange on August 18, are both owned by Tencent. investment object. Tencent’s shareholdings in Ningmeng Films and Bona Films are 19.78% and 4.36% respectively.

At a time when the market is not hot, Tencent as an Internet company and Tencent as an investment institution are busy reducing costs and increasing efficiency. In the future, exit may become a basic operation as frequent as entry. Who will be next? Everything is possible.

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