Event: on December 23, Tencent announced that he planned to pay about 460 million shares of JD.com to Tencent shareholders as an interim dividend. After the completion of the distribution, Tencent's share of JD.com will be reduced from 17% to 2.3%. He will no longer be the largest shareholder of JD.com, and Liu Chiping, president of Tencent, will also step down as a director of JD.com.
Comments: long-term investment timely exit, dividends benefit shareholders to demonstrate the value of Tencent's investment. We believe that at present, it may be an appropriate time for Tencent to withdraw from the investment: 1) Tencent has a large amount of social flow, which makes it more efficient to support companies in the early stages of development and to share the rapid growth of investment companies. At present, the pattern of e-commerce is taking shape. Tencent flow slows down the growth of JD.com; 2) the e-commerce ecology of Pinduoduo and Mini Program in Tencent system has been gradually improved. 3) JD.com 's share price remains resilient relative to its Internet peers, with Hong Kong stocks closing down 33% from their 21-year high on December 22. In the way of interim dividend, you will be able to share the investment results in JD.com with Tencent shareholders. This time, Tencent shareholders will be allocated 1 JD Class A common share for every 21 shares. If the closing price of Hong Kong shares of JD.com Group on December 22 is 279.2 Hong Kong dollars, the average market value of JD.com shares that can be distributed to Tencent shareholders is about HK $13.3, compared with Tencent's dividend of HK $1.02 per share at the end of 18-19-20.
After the reduction, JD.com remains Tencent's strategic partner, and the reduction may contribute to the ecological connectivity of Wechat. Tencent actively cooperates with regulatory guidance. In 2014, Tencent bought shares twice JD.com became the largest shareholder. In May 2019, JD.com and Tencent renewed the three-year strategic cooperation agreement. Wechat provides a first-class entrance for JD.com. The renewal of the agreement still needs to be paid attention to. As an extension of the anti-monopoly policy tone, the ecology of Internet companies has gradually moved towards interconnection this year, and the reduction of JD.com 's stake may help the balance of the major e-commerce in Wechat's ecology. With reference to the main policy guidance of platform economic antitrust supervision, it is suggested that Tencent should pay attention to the possibility of subsequent reduction of other large Internet platform companies.
The reduction of JD.com may have a negative impact on Tencent's performance and valuation, but the impact is relatively small. JD.com will no longer be listed as an associate in Tencent's financial statements. 1) in terms of performance: JD.com 's net profit will no longer be included in Tencent's share of the profits of the associated company and the joint venture company in proportion to equity. According to Bloomberg's consistent expectations and our estimates, it is estimated that Tencent's 22-year net profit will decrease by about 1%; at the same time, Tencent's net profit will be reduced by changes in the fair value of the shares of the associated company. 2) in terms of valuation, we include the discounted equity value of Tencent in the valuation of Tencent, and it is expected that the reduction of JD.com will reduce the valuation of Tencent by about 1%.
Profit forecast, valuation and rating: considering that the company's advertising and domestic game business are negatively affected by regulation in the short and medium term, and the performance is under pressure, we downgrade the company's 21-23 non-IFRS homing net profit forecast to 1304.6 / 1560.0 / 186.7 billion (compared with the last forecast-4.6% PE 9.7% PE 9.9%), the current price is respectively times 27-23-19, and the target price is reduced to HK $648. Considering the reduction of JD.com 's holdings is expected to help Wechat ecological connectivity, in line with the long-term policy guidance; the company's overseas game business layout continues to increase, financial technology and corporate services medium-and long-term growth is clear, maintain the "buy" rating.
Risk tips: regulatory uncertainty, overseas game business is not up to expectations, traffic dividends fade, competition intensifies.