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 oasis," is also rapidly gaining momentum, becoming one of the standout markets in the global market.

In the Hong Kong stock market, there has always been a "needle in the sea" position. $TENCENT (00700.HK)$ The stock price also surged to a two-year high, with a market cap surpassing 4 trillion Hong Kong dollars. Some investment banks remain bullish on Tencent even after its sharp rise, believing that its market cap will break through 5 trillion Hong Kong dollars.

Timing and momentum. Three years ago, Tencent, once valued at over 7 trillion Hong Kong dollars, entered a long downtrend, dropping by nearly 70% from its peak. Since the beginning of this year, Tencent's stock price has accumulated a gain of over 50%, even without this "dry autumn," Tencent has already regained its upward momentum.

Tencent is a typical example. Before the capital market boom, the reassessment of Chinese assets had already begun. Standing at the starting point of a new cycle, Tencent, deemed the "preferred stock" by many investment banks, can also rise to even higher levels.

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

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

01 Warming up

Tencent is gradually emerging from the trough. As of October 11, Tencent's stock price has risen by 50.75% so far this year, surpassing the HK$4 trillion market cap threshold.

However, specifically, Tencent's increase this year mainly came before the start of this round of capital market boom. Since the beginning of the year, driven by the surge in Hong Kong stocks, stabilizing performance, a billion yuan buyback plan, and other factors, Tencent's stock price has risen significantly. Before the start of this round of market momentum, 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 market trends.

From September 24 to October 10, Tencent's cumulative increase was only 13.21%, with a less outstanding performance. During the same period, the increases of semiconductor manufacturing international corporation, East Buy, Meituan, jd.com were 56.83%, 48.64%, 47.21%, and 47.75% respectively, while Alibaba's increase was also at 21.96%.

Some institutional investors believe that this round of market trends is mainly driven by the influx of hot money for trading, with trading behavior as the main driver and foreign public funds not yet entering the allocation phase.

Long-term Tencent investors also expressed to Wall Street News that bull markets are all about emotions, retail investors will only chase highs and sell lows, and are less likely to buy large cap stocks like Tencent, thinking they are too big to rise too much, and they would rather buy stocks with smaller market caps and more elasticity.

In addition, some institutional analysts believe that Tencent's main business in games will not benefit significantly from the economic cycle, so the smartest strategy is to switch to Meituan in a bull market, and switch to Tencent in a bear market. However, the difficult part is that 'you don't know when the bull market starts, nor when it ends'.

During the recent period of continuous stock price increase, Tencent has not stopped its buyback pace, still conveying confidence in the future to the capital markets and investors. In the context of the sharp rise in the Hong Kong stock market, on October 3, 4, and 7, Tencent's buyback amounts in the Hong Kong stock market were 0.251 billion Hong Kong dollars, 0.137 billion Hong Kong dollars, and 0.502 billion Hong Kong dollars respectively. On October 7, the highest buyback price reached 482 Hong Kong dollars per share.

Of course, this is a decrease compared to the previous daily buyback amount of 1 billion Hong Kong dollars. However, some investors also analyze that due to exchange rules restrictions, the Hong Kong stock buyback price cannot exceed 5% of the average closing price of the past 5 trading days. In the case of a significant short-term increase in the stock price, Tencent is firmly executing the buyback plan in a 'pinch'.

Looking at the cumulative buyback amount, as of the closing on October 7, Tencent has already repurchased over 89 billion Hong Kong dollars this year. At the current pace, Tencent is expected to achieve its promised billion buyback plan ahead of schedule this year, doubling compared to last year's 49 billion Hong Kong dollars buyback amount.

Continuous buybacks and performance improvements still make Tencent the top choice for institutions to hold positions. Morgan Stanley stated that Tencent demonstrates the best risk-return characteristics in the Chinese internet industry. The bank calls Tencent a 'safe haven' and lists it as the preferred stock in the field.

Even after the recent stock price increase, Morgan Stanley released a research report stating that its valuation still remains attractive, raising the target price from the previous 480 Hong Kong dollars to 18.75% to 570 Hong Kong dollars, maintaining its status as the bank's preferred stock.

02 Reassess

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 Technology 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, Tencent's stock price has fluctuated significantly, hovering around 3 trillion Hong Kong dollars, due to constraints from internet regulation, sluggish business growth, and significant shareholder sell-offs. The P/E ratio has declined from over 30 times to below 9 times at its lowest point.

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

Tencent has taken a series of practical actions to solidify investor confidence and continuously deliver financial reports that exceed market expectations. In the second quarter, its gaming sector, a stronghold of Tencent, showed signs of recovery. The gaming sector's revenue reached 48.5 billion yuan, hitting a quarterly record high, with a year-on-year growth of 9% both domestically and internationally, surpassing expectations. This has prompted investors to reevaluate Tencent and drive its stock price higher.

Even after a more than 50% increase in stock price this year, optimistic investors still believe that Tencent's stock price is undervalued. However, cautious investors argue that the valuation of Tencent, a large-cap stock, has reached levels similar to U.S. blue-chip stocks. It may be challenging for Tencent to continue to rise significantly.

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

The continued recovery in the gaming business is undoubtedly the main reason institutions are 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 new game releases.

Bocom International released a research report stating that Tencent's high growth in revenues from games is gradually being realized. It is expected that mobile game revenue in the third quarter will increase by 16%, compared to about 10% in the first half of the year. They continue to be optimistic about the stable business growth supporting the valuation boost.

As Tencent's flagship business, the gaming sector is also telling more stories to investors, being Pony Ma's biggest hope for Tencent's international expansion.

Recently, there are market rumors that Tencent and the Guillemot family, founders of Ubisoft Entertainment, are considering a joint acquisition of the French game company Ubisoft Entertainment and privatizing it, in order to stabilize Ubisoft Entertainment 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, providing Tencent with new imaginative possibilities.

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 gaming, Tencent's advertisements and enterprise services are also expected to achieve higher growth as the economy recovers. Morgan Stanley points out that the recent announcement of a series of national policies in the mainland may drive consumer recovery. Meanwhile, Lyon Securities sees trading, enterprise services, and overseas games as Tencent's future growth drivers.

In addition, as most of Tencent's investment assets are pro-cyclical assets, with the revaluation of Chinese concept stocks this round, their value is expected to rise as well.

With businesses like gaming already being fully priced by the market, Tencent aims to continue to achieve unexpected increases. Besides needing robust economic growth as support, they must also find the key to return to high growth.

In addition to gaming overseas, the AI wave that has risen since last year has become a revolutionary opportunity for Tencent. AI can not only be an accelerator for Tencent's business development but also open up new growth opportunities for its business-to-business segment, ensuring it remains competitive in the next super traffic entrance.

This will be the key for Tencent to return to a market cap of 4 trillion Hong Kong dollars and aim for 5 trillion Hong Kong dollars, enabling itself to reach its peak again. It needs to break free from the constraints of institutions on its current valuation and be reevaluated in value.

As times have changed, facing a new round of capital feast, Tencent needs to not only seize opportunities but also loosen up to find growth, promote longevity of old trees, and let the "new buds" thrive and grow.

The new journey is full of variables, and Tencent also needs to work hard to hold onto the "iron throne".

Editor/Somer