Hong Kong — Betting on the widening split between Asia’s two tech darlings would have been a slam-dunk trade in the third quarter. The question is whether it’s still worth chasing.

Anyone with the foresight to short Tencent Holdings’s shares while going long Taiwan Semiconductor Manufacturing (TSMC) could have made as much as 54% in the three months to the end of September.

The Hong Kong-listed gaming giant had its worst-ever showing relative to global tech, shedding about $84bn in market value since the end of June, just as the Taiwanese chip maker added $39bn. The latter’s out-performance was the widest on record.

Tencent, which is 31% owned by JSE-listed Naspers, is struggling to bounce back from this year’s lows after China got stricter on online games, the latest in a string of bad news that included the company’s first profit drop in at least a decade. Meanwhile, investors flocked to TSMC after a US competitor quit trying to develop the most advanced chip production technology, paving the way for Taiwan’s biggest company to solidify its dominance of the market.

While TSMC continues to fare better than Tencent in October, some say the trade will fade. Both stocks fell more than 1% on Friday, tracking losses for Asia tech shares after Bloomberg reported that China used a tiny chip to hack almost 30 US companies.

“It’s starting to look like a crowded trade,” said John Tsai, who owns the two stocks for Eastspring Investments in Singapore. “I don’t think the rotation from Tencent to TSMC is still accelerating — it’s probably slowing.”


One reason the trade won’t hold, according to Tsai, is valuations. At 26 times projected earnings, Tencent is about 55% more expensive than TSMC despite this year’s divergence, data compiled by Bloomberg shows. But long-term investors eyeing Tencent would still be getting one of the best deals since the stock started trading in 2004. Valuations for TSMC, on the other hand, are close to their highest in nine years.

After a stellar 2017, multiples for some Chinese tech companies turned so frothy that the first signs of not-so-good earnings hit the stocks hard. The latest results season offered little in the way of encouragement. In addition to Tencent, AAC Technologies Holdings, Sunny Optical Technology Group and Kingsoft  struggled.

Another view

For Eleanor Creagh, a market strategist for Saxo Capital Markets, uncertainty over the pace of gaming growth will continue to weigh on Tencent, as well as its pricey valuation relative to US internet shares. TSMC will fare better, even though it predicts softer demand for its semi-conductors, as it can retain loyal customers and grab market share from retrenching rivals, she said.

“Momentum should continue for this trade,” Creagh said from Sydney. “We expect Tencent to remain under pressure in the near term, therefore incremental appreciation in TSMC’s share price will likely outpace that of Tencent.”

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While the two giants of the emerging-market world are exposed to separate businesses and sell across different geographies, they’re often lumped together by global money managers wanting a slice of fast-growing tech. TSMC and Tencent are the largest stocks on MSCI’s EM benchmark, which is tracked by almost $2-trillion worldwide.

They’re also among the most owned: some 61% of global emerging-market funds featured TSMC in their portfolios, and 51% had Tencent shares, according to eVestment data as of June. The positioning after last quarter’s winning trade means that betting against Tencent may be getting too risky now, according to JPMorgan Asset Management’s Howard Wang.

Chinese regulators resuming approvals for online games or a surge in Chinese markets would be two such risky scenarios, said Wang, who oversees JPMorgan Asset’s $536m Greater China fund from Hong Kong. “It’s more about asset-allocation risk than anything to do with the companies themselves.”