Author | Huang Yu Editor | Liu Baodan Last year, thanks to the success of the "Speeding" on iQiyi, the company has had a difficult time recently. On the one hand, the explosively popular TV series is on hiatus, and on the other hand, the derivative concert of the variety show "Plant Some Goodness" has been criticized for "free offline but paid online." According to Wall Street News, the second Wheat Field Music Festival, produced by iQiyi's reality show "Plant Some Goodness," was held on June 6th. Some viewers had previously received free offline tickets through official activities, while online viewers, even iQiyi members, had to pay RMB 12 for viewing, and the viewing period was valid until June 14th. This differentiated pricing model has caused dissatisfaction among many viewers, who question that iQiyi's move is "cutting corners." In response, iQiyi's customer service said, "You can buy tickets to watch the concert live according to your own needs, and the edited content of the concert will be launched on the main platform in the future." In fact, this is not the first time that long video platforms represented by iQiyi have been accused of "cutting corners." In recent years, membership grading systems, early access, and inventory restrictions have often caused user backlash, in addition to paying extra for derivative programs. The differential pricing model reflects the growth anxiety faced by long-form video platforms such as "i优腾."

In today's weather is good. Today's weather is good.

A 'dry autumn' in the capital markets is stirring up investors' emotions. The Hong Kong stock market, which has always been jokingly referred to as a 'value vacuum,' is also quickly gaining momentum, becoming one of the standout markets in the global market.

Tencent, which has always held the position of a 'sacred needle on the sea' in the Hong Kong stock market, pushed its stock price to a two-year high, with a market cap above 4 trillion Hong Kong dollars. Some investment banks remain bullish even after Tencent's significant rise, believing its market cap will surpass 5 trillion Hong Kong dollars.

Timing and trend. Three years ago, Tencent, which once had a market cap of over 7 trillion Hong Kong dollars, entered a long downtrend when its stock price fell to less than 30% of its peak value. Since the beginning of this year, Tencent's stock price has accumulated a growth of over 50%, even without this 'dry autumn', Tencent has already regained its momentum.

Tencent is a typical example. Prior to the capital market boom, the revaluation of Chinese assets had already begun. If more powerful measures are taken in fiscal policy going forward, standing at the starting point of a new cycle, Tencent, considered a 'top pick' by many investment banks, can also use this opportunity to aim higher.

Of course, as the era of rapid growth in the internet industry comes to an end, it is not easy for Tencent to return to its peak. While the boom continues, Tencent's own performance is the key for investors to vote. In addition to maintaining the certainty of profitability, it also needs to further open up its imaginative space for future development in order to raise its valuation.

Tencent will also be a specific portrayal of China's structural transformation in the new era, where everything will be significantly different.

Rebound

Tencent is gradually emerging from the low point. As of October 11th, Tencent's stock price has risen by 50.75% this year, surpassing the 4 trillion Hong Kong dollar market cap threshold.

However, specifically, Tencent's increase this year mainly came before the start of this round of capital market frenzy. Since the beginning of this year, with the surge in Hong Kong stocks, the stabilization and rise of performance, and the billion-dollar buyback plan driving them collectively, Tencent's stock price has risen significantly. Prior to the start of this round of the market, Tencent had accumulated an increase of about 33.2%.

The early recovery of the stock price has to some extent restrained Tencent's increase in this round of the market.

From September 24th to October 10th, Tencent's cumulative increase was only 13.21%, showing unimpressive performance. During the same period, companies like SMIC, East Buy saw increases of 56.83% and 48.64% respectively, while Meituan, jd.com increased by 47.21% and 47.75%, and Alibaba's increase was also at 21.96%.

Some institutional investors have indicated that this round of the market is mainly driven by the inflow of hot money for trading, with trading behavior as the main focus, and foreign public funds have not yet entered the allocation phase.

Also, long-term Tencent investors who pay attention to Wall Street News believe that bull markets are all about emotions, and retail investors will only chase highs and sell lows, not likely to buy Tencent, a large-cap stock, as they feel it's too big and unlikely to rise too much. They are willing to buy stocks with smaller market caps and greater elasticity.

In addition, some institutional analysts believe that Tencent's main gaming business will not significantly benefit from economic cycles. Therefore, the smartest strategy is to switch to Meituan in a bull market and Tencent in a bear market. However, the challenge lies in not knowing when the bull market will start or end.

During a recent period of continuous stock price increases, Tencent has not stopped its buyback activities, continuing to convey confidence in the future to the capital markets and investors. Against the backdrop of a strong Hong Kong stock market, on October 3, 4, and 7, Tencent repurchased 0.251 billion HKD, 0.137 billion HKD, and 0.502 billion HKD respectively. The highest repurchase price on October 7 reached 482 HKD per share.

Of course, compared to the previous daily repurchase amount of 1 billion HKD, there has been a decrease. However, some investors believe that due to exchange rules restrictions, the repurchase price of Hong Kong stocks cannot exceed 5% of the average closing price of the past 5 trading days. With a significant short-term increase in stock price, Tencent is resolutely executing its buyback plan in a "squeeze" situation.

From the perspective of cumulative repurchase amount, as of the closing of October 7, Tencent has repurchased over 89 billion HKD this year. At the current pace, Tencent is expected to achieve its annual commitment of repurchasing a billion HKD ahead of schedule, doubling the 49 billion HKD repurchase amount from last year.

Continuous buybacks and performance improvements still make Tencent the top choice for institutions to hold positions. Morgan Stanley says Tencent exhibits the best risk-return characteristics in the Chinese internet industry. The bank calls Tencent a "safe haven" and lists it as its preferred stock in this sector.

Even after the recent stock price increase, Morgan Stanley released a research report stating that Tencent's valuation still remains attractive. They have raised the target price from the previous 480 HKD by 18.75% to 570 HKD, maintaining its top stock status at the bank.

Reevaluation

In the era of mobile internet, Tencent is the absolute winner, relying on the two major moats of social and gaming businesses, firmly holding the position of the "King of Tech Stocks" in China. In early 2021, its stock price once exceeded 700 Hong Kong dollars per share, with a market cap exceeding 7 trillion Hong Kong dollars.

However, over the past three years, due to internet regulation constraints, lackluster business growth, large shareholder shareholding reductions, Tencent's stock price has experienced significant fluctuations, with its market cap hovering around 3 trillion Hong Kong dollars. The P/E ratio has dropped from over 30 times to less than 9 times at its lowest.

There have been continuous doubts in the market: Does Tencent still have a future?

Tencent, through a series of concrete actions, has stabilized investor confidence and consistently delivered financial reports that exceed market expectations. In the second quarter, as Tencent's gaming business, a fortress for the company, rebounded, the gaming segment's revenue reached 48.5 billion yuan, a quarterly record high, with a 9% year-on-year growth both domestically and internationally, surpassing expectations. Investors have re-evaluated Tencent accordingly, driving up Tencent's stock price.

After this year's stock price rise of over 50%, optimistic investors still believe that Tencent's stock price is undervalued; while cautious investors believe that the valuation level of large-cap stocks like Tencent is approaching that of U.S. blue-chip stocks, making substantial further gains difficult.

Morgan Stanley has recently successively raised Tencent's target price from 450 Hong Kong dollars to 570 Hong Kong dollars. Based on this calculation, Tencent's total market cap could surpass 5 trillion Hong Kong dollars.

The continued recovery of the gaming business undoubtedly provides the biggest reason for institutions being bullish on Tencent. Morgan Stanley's report points out that Tencent's gaming business is expected to grow by 12.5% year-on-year in the third quarter, mainly driven by perennial games like "Honor of Kings" and the momentum of new games.

Bocom Intl released a research report stating that Tencent's high growth in revenue from games is gradually being released, with an expected 16% increase in mobile game revenue in the third quarter, compared to about 10% in the first half of the year. They continue to be bullish on the company's steady business growth, supporting valuation improvement.

Furthermore, as Tencent's flagship business, games are also telling more stories to investors, which is the biggest hope for Tencent's internationalization as mentioned by Ma Huateng.

Recently, there have been market rumors that Tencent and the founding family of Ubisoft Entertainment, Guillemot family, are considering a joint acquisition of the French gaming company Ubisoft Entertainment and privatizing it to stabilize the company and enhance its value. However, this option is still in the early stages, and it is uncertain whether the deal will eventually go through.

If the acquisition is successful, Tencent Games' global expansion will receive further support, and Tencent will have a different space for imagination.

Macquarie also pointed out that companies like Tencent, PDD Holdings, and Ctrip are in a favorable position to capitalize on international opportunities, with the potential for overseas expansion to become a long-term driver of growth. "Investors should pay more attention to the global prospects of Chinese internet-related industries. While risks related to geopolitical tensions may lead to short-term volatility, they may also create buying opportunities."

Apart from games, Tencent's advertising and enterprise services are also expected to achieve higher growth as the economy recovers. Morgan Stanley pointed out that the recent announcement of a series of national policies in the mainland may promote consumption recovery. Lyon Securities views trading, enterprise services, and overseas games as Tencent's future growth drivers.

In addition, as a majority of Tencent's investment assets are pro-cyclical assets, with the revaluation of Chinese concept stocks in this round, their value can also rise accordingly.

With businesses like gaming already fully priced by the market, Tencent aims to continue to achieve unexpected increases. Apart from strong economic growth as a support, Tencent must also find the key to returning to high growth.

In addition to exporting games abroad, the AI ​​wave that has risen since last year has also become a revolutionary opportunity for Tencent. AI ​​can not only be a multiplier for Tencent's business development but also open up new growth opportunities for its B-end business, ensuring its competitive position in the next super traffic entry competition.

This will be the key for Tencent to return to a market cap of 4 trillion Hong Kong dollars, aiming for 5 trillion Hong Kong dollars, and reaching its peak again. It needs to break free from the shackles of the institutions' current valuation and have its value reevaluated.

The times have changed, facing a new round of capital feasts, Tencent must not only seize the opportunity but also release constraints to seek incremental growth, promote evergreen innovation, and nurture new growth opportunities.

The new journey is full of variables, Tencent also needs to work hard to maintain its 'iron throne'.