Dark clouds hover over Tencent and Ping An, as they move beyond their core businesses
Investors may just have found the reason they need to keep on pushing two of Hong Kong’s best-performing blue-chips higher.
After more than doubling in 2017, shares of Tencent and Ping An Insurance have lost momentum. By now, neither is cheap. Tencent is valued at 36 times estimated 2018 earnings — 56% more expensive than Facebook. Ping An’s Hong Kong stock, meanwhile, is trading at a rare premium to its yuan-denominated shares in Shanghai, a sign of global investors’ enthusiasm.
But there are plenty of dark clouds hovering. Investors may downgrade Tencent from a technology to a media firm, as they awaken to the notion that just one scandal — Cambridge Analytica in Facebook’s case — can sink a social media giant’s valuation. Meanwhile, insurers may be asked to become buyers of last resort in the event of a bond rout, now that the China Insurance Regulatory Commission is the subject of a hostile takeover by the banking regulator.
Ping An and Tencent have moved well beyond their core businesses. Since 2015, the insurer spent at least $20bn buying companies, while Tencent has splashed out more than $75bn. To justify their sky-high valuations, they need not only to report consistent core business earnings, but also to demonstrate they can spot promising new areas, nurture them and monetise them by raising billions through listings.
This is exactly what the two companies, both based in Shenzhen, are doing: becoming spin-off machines.
Ping An’s Good Doctor, an online healthcare platform, is seeking to raise as much as $1.1bn in a Hong Kong IPO. Retail investors are expected to apply for at least 115 times the stock available to them, Ming Pao Daily reported on Monday.
IPOs are also planned for the insurer’s Health Connect, which helps hospitals access patients’ medical records, and OneConnect, a provider of AI-powered services to banks such as risk management. And don’t forget Lufax: China’s most popular peer-to-peer lender, profitable for the first time in 2017, may be the largest of Ping An’s spin-offs. The company has bigger loan balances than US-listed Yirendai or PPDAI Group, and is expected to go public in the next year or so.
Meanwhile, Tencent is preparing to take China’s largest music-streaming company public in the US following the successful debut of Europe’s Spotify Technology, the Wall Street Journal reported at the weekend. Tencent Music Entertainment is seeking a valuation of at least $25bn, a sharp jump from the $12.5bn tag it commanded in late 2017, the newspaper said.
Other Tencent subsidiaries that could seek flotations in 2019 or so include its travel portal LY.com and film unit Tencent Pictures.
It’s high time Tencent and Ping An listed these units. If they hoard investments, there’s a risk investors will start questioning their acquisition strategies and assign a so-called "conglomerate discount" to the shares. That’s a syndrome SoftBank Group is familiar with.
And if the IPOs act as a catalyst for further share-price gains, what’s not to like?
• Ren is a Bloomberg Gadfly columnist covering Asian markets and Gopalan is a Bloomberg Gadfly columnist covering deals and banking. This column does not necessarily reflect the opinion of Bloomberg and its owners.