PART 1 – Tencent Holdings Limited Company
Introduction
Tencent Holdings Limited is a Chinese multinational technology conglomerate. It is a constituent stock of the Hang Seng Index listed on the Hong Kong Stock Exchange. The company specializes in various Internet-related services and products, including online advertising, entertainment, artificial intelligence, and technology in China and globally (Lekovic,2018). It was founded in 1998 and is now one of the largest internet companies in the world, with a market capitalization of over $800 billion. Tencent has a wide global presence, with offices and operations in almost every major global economy. The company also owns several subsidiaries, including WeChat, the world’s largest mobile messaging app, and Tencent Music Entertainment Group, the world’s largest music streaming platform. In addition to its core internet business, Tencent invests in various other industries, including gaming, film and television production, and various technology startups (Haig,2020).
Tencent Holdings Limited has seen remarkable growth in its share price over the past three years. The stock began trading for HK$355.90 in Jan 2018 and has since risen to HK$722.20 as of Jan 2021, an increase of over 102%. This growth has been driven by increasing demand for Tencent’s products and services, particularly its gaming and advertising businesses (Baum et al., 2021). The company’s share price has outperformed the Hang Seng Index over the same period, with the index increasing by only 11% over the last three years. Tencent’s stock has also outperformed its peers in the technology sector, with the Hang Seng Technology Index increasing by only 48% over the same period. Tencent’s share price has been volatile over the past three years, but the trend has been upward overall. The stock peaked at HK$741.80 in February 2020 before falling to a low of HK$524.90 in March 2020 due to the market downturn caused by the Covid-19 pandemic. However, the stock quickly recovered and is now trading above its pre-pandemic highs. The company’s share price has also been supported by strong earnings growth and increasing investor confidence (Hong Kong stock exchange). Tencent’s earnings per share have grown from HK$1.99 in 2018 to HK$3.42 in 2020, an increase of nearly 72%. This growth in earnings has been largely driven by the company’s strong revenue growth over the same period. In addition, Tencent’s share price has been buoyed by the company’s high P/E ratio, which currently stands at around 25, higher than the average P/E ratio of the Hang Seng Index, which currently stands at around 20.
Events and news impacting the company share prices
Various news events have significantly impacted Tencent’s share price over the past three years. In late 2018, the company’s share price increased by over 10% following the news that the company was partnering with China Life Insurance to create a new online health insurance platform. This news caused investor confidence in the company and helped boost the stock price. In early 2019, the company’s share price rose by nearly 20% after the Chinese government announced it was loosening restrictions on Tencent’s gaming business (Shang,2021). This news caused investor optimism in the company to increase, as it was seen as a sign that the company would be able to capitalize on the growing market for gaming in China. The company’s share price also increased significantly in early 2020 after the company announced that it was launching a new cloud gaming platform. This news caused investor confidence in the company to increase, as it was seen as a sign that the company was positioning itself to capitalize on the growing demand for cloud gaming services. The company’s share price fell sharply in March 2020 after the World Health Organization declared a pandemic due to the Covid-19 virus (Yin,2018). This news caused a market downturn, and Tencent’s stock fell by nearly 25% from its peak price of HK$741.80 in February 2020 to a low of HK$524.90 in March 2020. However, the stock quickly recovered and is now trading above its pre-pandemic highs. This recovery has been driven by the company’s strong financial performance and increasing investor confidence. The company’s earnings per share have grown from HK$1.99 in 2018 to HK$3.42 in 2020, an increase of nearly 72%. This growth in earnings has been largely driven by the company’s strong revenue growth over the same period.
- Financial ratios
Tencent’s financial ratios provide useful insights into the company’s performance over the past three years. I have calculated several key financial ratios for the company for 2018, 2019, and 2020. Various ratios are therefore calculated and analyzed as increased or decreased from 2018 to 2020.
Return on equity
Return on Equity (ROE) = Net Income / Total Equity ROE
(2018)
= 28.7 billion / 155.8 billion = 18.21%
ROE (2019)
= 38.3 billion / 199.1 billion = 19.18%
ROE (2020)
= 47.5 billion / 208.2 billion = 22.91%
The company’s Return on Equity (ROE) is calculated by dividing its net income by its total equity. For Tencent, the ROE was 18.21% in 2018, 19.18% in 2019, and 22.91% in 2020, as shown in the calculations above. This indicates that the company’s profitability has increased over the last three years, as its net income has grown faster than its total equity.
Price-to-earnings ratio
Price-to-Earnings (P/E) Ratio = Share Price / Earnings Per Share
P/E (2018) = 355.90 / 1.99 = 17.79
P/E (2019) = 459.10 / 2.21 = 20.80
P/E (2020) = 722.20 / 3.42 = 21.24
The company’s Price-to-Earnings (P/E) ratio is calculated by dividing its share price by its earnings per share. For Tencent, the P/E ratio was 17.79 in 2018, 20.80 in 2019, and 21.24 in 2020. The results show an increase from 2018 to 2020, and it can therefore be concluded that the company’s share price has been increasing faster than its earnings over the last three years, as its share price has been rising faster than its earnings per share.
Operating profit margin
Operating Profit Margin = Operating Profit / Revenue
Operating Profit Margin (2018).
= 17.2 billion / 102 billion = 17.66%
Operating Profit Margin (2019)
= 23.7 billion / 127 billion = 20.22%
Operating Profit Margin (2020)
= 37.3 billion / 160 billion = 22.88%
The company’s operating profit margin is calculated by dividing its profit by revenue. For Tencent, the operating profit margin was 17.66% in 2018, 20.22% in 2019, and 22.88% in 2020. This indicates that the company has become more efficient in generating profits, as its operating profit has increased faster than its revenue.
Returns on earnings
Return on Earnings (ROE) = Net Income / Earnings Per Share
ROE (2018) = 28.7 billion / 1.99 = 14.45%
ROE (2019) = 38.3 billion / 2.21 = 17.37%
ROE (2020) = 47.5 billion / 3.42 = 13.87%
Tencent’s financial ratios indicate that the company has performed well over the past three years. The company’s ROE, P/E ratio, and operating profit margin have all been increasing over the same period, indicating that the company has become more efficient in generating profits and that investor confidence in the company has been increasing. This makes Tencent an attractive option for potential investors.
Dividends
Tencent has had a consistent dividend policy over the past three years. The company has paid a dividend of HK$0.10 per share each year since 2018. This dividend has remained consistent despite the significant changes in the company’s share price and financial performance over the same period. The company’s dividend yield has increased over the past three years, from 0.28% in 2018 to 0.41% in 2020. This increase is due to the company’s share price increasing faster than its dividends over the same period. As a result, the company’s dividend yield is now higher than the average dividend yield of the Hang Seng Index, which currently stands at 0.36%.
2018
Dividend Yield = Dividend / Share Price
Dividend Yield (2018)
= 0.10 / 355.90 = 0.28%
2019
= 0.10 / 459.10 = 0.22%
2020
= 0.10 / 722.20 = 0.41%
The company’s dividend payout ratio has also increased over the same period, from 34.50% in 2018 to 28.84% in 2020. This indicates that the company’s dividends have grown faster than its earnings over the last three years.
Financing and investment strategy
Tencent has had a successful financing and investment strategy over the past three years. The company has secured financing from various sources to fund its growth and has also invested in various other industries, including gaming, film and television production, and various technology startups. Tencent has also raised capital through equity offerings, such as issuing new shares and selling existing shares. This has enabled the company to grow its business and fund its expansion into new markets. The company has also been successful in its investment strategy, with its investments in various industries helping to drive its growth. Tencent’s investments in technology startups have been particularly successful, with the company’s investments helping to fuel the growth of these companies and, in turn, increasing Tencent’s revenue (Li et al., 2022).
PART B
The scenario describes a potential takeover of Company B by Company A. Company A has 6 million shares in issue, and Company B has 8 million. On day 1, the market value per share for Company A is 90 pounds, and for Company B, it is 60 pounds. On day 2, the management of A decides at a private meeting to make a cash takeover bid for B for 70 pounds per share. The takeover is expected to generate large operating savings with a value of 160 million pounds. On day 6, Company A publicly announces an unconditional offer to purchase all shares of Company B for 70 pounds per share, with settlement on day 20. Details of the large savings are not disclosed at this time. On day 12, the details of the savings are announced. The potential acquisition of Company B by Company A is likely beneficial for both companies. Company A will benefit from the operating savings and will be able to tap into Company B’s resources, while Company B will benefit from the increased share price. The shareholders of Company B will benefit from the higher share price and are likely to accept the offer. The takeover of Company B by Company A is likely beneficial for both companies. The large savings could generate significant value for both companies while allowing them to combine resources and reach more customers. The details of the large savings must be made public to ensure fairness and transparency. This will ensure that shareholders are fully aware of the potential benefits of the takeover.
Strong Form Efficient in the first Circumstance:
Day 2: Company A Share Price = 90 pounds; Company B Share Price = 70 pounds
Day 6: Company A Share Price = 100 pounds; Company B Share Price = 70 pounds
Day 12: Company A Share Price = 100 pounds; Company B Share Price = 80 pounds
Semi-Strong Form Efficient in the Above Circumstance:
Day 2: Company A Share Price = 90 pounds; Company B Share Price = 70 pounds
Day 6: Company A Share Price = 90 pounds; Company B Share Price = 70 pounds
Day 12: Company A Share Price = 90 pounds; Company B Share Price = 80 pounds
Day 2:
Strong Form Efficient
The share price of Company A remains unchanged at 90 pounds, and the share price of Company B increases to 70 pounds as the market is aware of the private meeting and potential takeover.
Semi-Strong Form Efficient
The share price of both Company A and B remains the same as the market has yet to be made aware of the potential takeover.
Day 6:
Strong Form Efficient
The share price of Company A increases to 100 pounds as the market is aware of the public announcement of the unconditional offer. The share price of Company B remains unchanged at 70 pounds.
Semi-Strong Form Efficient:
The share price of Company A remains unchanged at 90 pounds as the market has yet to be made aware of the unconditional offer. The share price of Company B remains unchanged at 70 pounds.
Day 12:
Strong Form Efficient
The share price of Company A remains unchanged at 100 pounds as the market is aware of the details of the large savings that will be derived from the takeover. The share price of Company B increases to 80 pounds.
Semi–strong form efficient
The share price of Company A remains unchanged at 90 pounds as the market has yet to be made aware of the details of the large savings that will be derived from the takeover. The share price of Company B increases to 80 pounds.
Day 2:
Strong Form Efficient: The share price of Company A increases to 95 pounds, and the share price of Company B decreases to 55 pounds as the market is aware of the private meeting and potential takeover.
Semi-Strong Form Efficient: The share price of both Company A and B remain the same as the market has not been made aware of the potential takeover.
Day 6:
Strong Form Efficient: The share price of Company A remains unchanged at 95 pounds as the market is aware of the public announcement of the one newly issued share of A for each share of B offered. The share price of Company B decreases to 55 pounds.
Semi-Strong Form Efficient: The share price of Company A decreases to 90 pounds as the market has yet to be made aware of the one newly issued share of A for each share of B offer. The share price of Company B remains unchanged at 60 pounds.
Day 12:
Strong Form Efficient: The share price of Company A remains unchanged at 95 pounds as the market is aware of the details of the large savings that will be derived from the takeover.
The share price of Company B increases to 65 pounds.
Semi-Strong Form Efficient: The share price of Company A decreases to 90 pounds as the market has yet to be made aware of the details of the large savings that will be derived from the takeover. The share price of Company B increases to 65 pounds.
The concept of an efficient market had existed since the early 1900s, when French mathematician Louis Bachelier first proposed that market prices be random, unpredictable, and not necessarily reflect the underlying value of assets or securities (Yin, 2018). Since then, economists such as Eugene Fama have further developed the efficient market hypothesis (EMH), which argues that all publicly available information is already reflected in current asset prices (Shang, 2021). This suggests that prices in an efficient market will always accurately reflect available information. However, a growing body of empirical evidence suggests that markets are only sometimes efficient and that prices only sometimes fully reflect available information. For example, studies have found that stock prices tend to overreact to news and events, resulting in prices that are only sometimes reflective of the asset’s underlying value.
Furthermore, research has also shown that stock markets are subject to periods of overvaluation and irrational exuberance, indicating that prices do not always reflect a business’s true fundamentals. These findings suggest that prices in an efficient market may only sometimes reflect available information. In addition, evidence suggests that markets are not always efficient due to cognitive biases and behavioral anomalies (Nitsenko et al., 2019). Studies have found that investors are subject to various cognitive biases, such as anchoring, which can lead to prices that are not reflective of the underlying value of a particular asset. Furthermore, research has also found several behavioral anomalies that can affect market efficiencies, such as herding behavior and momentum trading. These findings indicate that prices in an efficient market may only sometimes fully reflect available information (Melnik, 2019).
In terms of the efficiency of the capital market in Hong Kong, there is evidence to suggest that it is only sometimes efficient. For example, research has found that the Hong Kong stock market has been subject to periods of irrational exuberance, with prices driven by speculation rather than fundamentals. Furthermore, studies have also found that the market is prone to bubbles and crashes, indicating that prices do not always reflect the underlying value of the assets. These findings suggest that the capital market in Hong Kong is only sometimes efficient and that prices may only sometimes fully reflect available information. An example of a company listed on the Hong Kong stock exchange is Tencent, one of the largest technology companies in China (Li et al., 2022). The stock price of Tencent has been subject to periods of irrational exuberance, with prices being driven by speculation rather than fundamentals. For example, in 2017, Tencent’s stock price rose by more than 50%, despite the company’s fundamentals not keeping pace with the rise in the stock price. This indicates that the market was not always efficient and that prices were only sometimes reflective of the asset’s underlying value. Furthermore, there have also been periods of overvaluation and bubbles, further indicating that the market is only sometimes efficient and that prices may only sometimes reflect available information.
Another example of a company listed on the Hong Kong stock exchange is AIA, one of the largest insurance companies in Asia. AIA’s stock price has been subject to periods of irrational exuberance, with prices being driven by speculation rather than fundamentals. For example, in 2017, AIA’s stock price rose by more than 30%, despite the company’s fundamentals not keeping pace with the rise in the stock price. This indicates that the market was not always efficient and that prices were only sometimes reflective of the asset’s underlying value. Furthermore, there have also been periods of overvaluation and bubbles, further indicating that the market is only sometimes efficient and that prices may only sometimes reflect available information (Li et al., 2022).
References
Baum, A. E., Crosby, N., & Devaney, S. (2021). Property investment appraisal. John Wiley & Sons.
Haig, R. M. (2020). The concept of income—economic and legal aspects. In Forerunners of Realizable Values Accounting in Financial Reporting (pp. 140–167). Routledge.
Leković, M. (2018). Evidence for and against the validity of the efficient market hypothesis. Economic themes, 56(3), 369–387.
Li, Q., Liu, X., Chen, J., & Wang, H. (2022). Does stock market liberalization reduce stock price synchronicity?—Evidence from the Shanghai-Hong Kong stock connect. International Review of Economics & Finance, 77, 25-38.
Melnik, J. (2019). China’s “National Champions” Alibaba, Tencent, and Huawei. Education About Asia, 24(2), 28–33.
Nitsenko, V., Chukurna, O., Mardani, A., Streimikis, J., Gerasymchuk, N., Golubkova, I., & Levinska, T. (2019). Pricing in the Concept of Cognitive Marketing in the Context of Globalization: Theoretical, Methodological and Applied Aspects. Montenegrin Journal of Economics, 15(4), 131-147.
Shang, X. (2021). A Study on the Business Model of Tencent Group. Turkish Journal of Computer and Mathematics Education (TURCOMAT), 12(13), 3016–3022.
Yin, C. (2018). The Path of Least Resistance: How Strict Chinese Stock Market Regulation Incentivizes Chinese Companies to List in Foreign Stock Exchanges.
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