Tencent: Outperforming the Megacaps

Published 2024/10/15, 09:44
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China’s Largest Companies Rally on Fiscal and Monetary Stimulus as the Country Grapples With Its Growth Target (NYSE:TGT)

  • Tencent (HK:0700), China’s largest publicly traded company rallied 20%+ from the stimulus
  • The country is tackling major real estate and banking problems
  • A new stimulus wave was announced on Saturday, October 12
  • Can China reach the 5% growth target? And if they do, what can happen to Tencent?

The world’s second largest economy recently unveiled a stimulus plan on fears that it might not reach its growth target for the year. This move comes after the country’s struggling real estate and banking sectors dragged the economy down. The fiscal and monetary boost caused the Chinese stock market to rally, with the largest company there, Tencent, gaining 23% in value over two weeks. What’s at stake for the tech giant with the further stimulus revealed on Saturday?

Double Trouble

China is on a warpath to reach its ambitious growth goal for the year after a slump in Gross Domestic Product (GDP) growth for 2020 and 2022. The regime is dedicated to proving that it can outperform both Europe and the United States in productivity. Meanwhile, its real estate and banking sectors are suffering, and citizens are anxious about their future.

China is a one of the world’s largest importers of raw materials such as iron and petroleum. That’s in part due to their strong construction industry. Earlier this year, their property market crashed abruptly, sending ripples in the global economy.

Some of their largest constructors defaulted on their loans as much of their operations were heavily leveraged, or in other words financed mostly by debt. The ensuing crash caused dozens of small banks to implode due to their exposure to the property sector. One of China’s most profitable businesses was on the back foot.

  • China’s immense real estate market crashed in 2024, causing pain to the entire economy
  • It took a part of the banking sector with it, resulting in the collapse of 40 regional banks

To Make Matters Worse

Despite these roadblocks, the Chinese Politburo laid out an ambitious plan to close 2024 with a GDP growth of 5%. For reference, the Eurozone economy grew an average of 0.4% for 2023, while the US – 2.9%. Such stagnant growth is expected in a high interest rate environment when the economy is cooling down from a period of high inflation.

China didn’t experience high inflation the same way the rest of the world did, which is also why their interest rates didn’t go up during the pandemic. Quite the opposite – their monetary policy was dovish during the entire time, which is usually a sign of a booming economy.

Unfortunately, even with interest rates at an all-time low, they have been struggling to grow at the desired rate. This is because conventional methods of stimulating the economy don’t exactly work when it’s experiencing deflationary pressures. When there is lower demand for everything, prices go down, but so do salaries that are used to repay debt.

The 2nd quarter growth rate in China is lowest it’s been since Q2 2023. Source: https://tradingeconomics.com/china/gdp-growth

This created a problem where monetary policy isn’t stimulating enough due to lower demand domestically and from abroad. This meant that the economy wouldn’t grow as fast unless the government intervened. And that’s exactly what they did.

  • Consumer demand for goods and services is lower
  • This makes regular monetary policy ineffective in stimulating growth
  • The only option left is for fiscal stimulus – by injecting cash in the system

More Money Is Always a Solution

On September 24, 2024, China unveiled the biggest stimulus package since the pandemic. One of the key changes they made was lowering the minimum amount of money banks must keep on hand. This virtually freed up $141 billion in capital that can be lent or invested. As a result, the Shanghai and Hong Kong stock markets rallied. Their main indexes climbed double digits in a matter of hours.

A second financial intervention was announced on October 12. Although the details surrounding it are still murky, one thing is certain – the Chinese central bank is expected to issue large amounts of bonds to finance its operations. According to one source, they might be considering raising up to 6 trillion yuan from debt in the next three years.

This adds up to about $846 billion of capital they would be looking to inject into their ailing industries and broader financial sector. For reference, that’s about 7% of the combined value of all publicly traded Chinese companies. It’s also more than the combined market cap of their two largest companies – Tencent and ICBC!

The last time China issued 1 trillion yuan worth of bonds was on October 24, 2023. Even though the proceeds didn’t go towards the market, the Shanghai Composite gained 4% in a month. This time around though, the money has “market” written all over it, and it’s expected to be six times more.

Potential 6x larger market gain from a possible 6T yuan bond issuance. Source: https://tradingview.com/


“What does that mean for Tencent?” you might ask. Let’s find out.

  • $141 billion have been technically made available to banks to invest and lend
  • Another $846 billion is expected to be financed through bonds
  • Stock markets rally on expectations of fresh capital

What It Means For Tencent

Tencent is a major telecommunications and entertainment company in the world and the largest one on the Chinese market in terms of market capitalization. At the time of writing, they are worth just over five hundred billion US dollars. During the pandemic when consumer spending skyrocketed for certain products, their unique positioning allowed them to reach almost a trillion US dollars in value.

Source: https://tradingview.com


The company’s western counterpart—Meta (NASDAQ:META) (NASDAQ: META)—just recently attained its new all-time high price. When a new top is reached, it’s hard to determine how far up prices can continue rising. Tencent’s growth, on the other hand, might be a little more clear-cut. Not only can it climb another 60% to get back to its past levels but Wall Street analysts have set a target for the stock 32% higher than current market prices.

Source: https://tradingview.com


If China is dead set on reigniting their economy, do you think they will do anything in their power to boost their own stock market? The financial injections are designed to stimulate consumer and business spending. If more goods and services are bought, would that drive company valuations up?

Tencent’s stock surged by 23% in eleven days just on the news of more money coming in. Now imagine what could happen to it if banks, fund managers, and other financial institutions started investing in it too.

If Tencent’s stock was to climb all the way back to 698 Hong Kong dollars per share, its market capitalization would be close to a trillion US dollars again. If Meta is valued at $1.5 trillion right after it’s all-time high and Tencent hasn’t notched a new one yet, do you think it’s possible that it surpasses its western competitor?

China isn’t looking for sustainable growth, it’s looking for growth. And right now, they must give handouts for this to work. Regardless of how long a rally can last on fiscal stimulus alone, China is in for one. If stock market growth is a question of when and not if, not being ready for it is a matter of choice and not chance.

Technical Analysis of Tencent

Source: https://tradingview.com

Uptrend Channel

  • Tencent has been printing within an upward channel since March. If the price maintains this pattern, it could potentially reach the 577 HKD price target and even its all-time high around 700 HKD.

Daily Key Level

  • 417 HKD was the high on January 26, 2023, and it previously acted as strong resistance. Now that the price has surpassed this level, it has turned into support. If this level is retested and holds, it could signal the formation of a higher low, strengthening the case for an upward move.

Bollinger Bands

  • The wide channel displays the high volatility and suggests potential narrowing ahead, which could lead to sideways movement. However, the outlook remains bullish as the price stays above the daily key level, signaling a positive buildup for another leg upward.
  • Additionally, the middle band aligning with the daily key level acts as confirmation of support in this zone, strengthening the case for continued upward momentum.

Relative Strength Index (RSI)

  • The indicators is hovering around 58, indicating that the asset is not yet considered overbought. This supports the bullish outlook, especially since the price is at a high not seen in approximately 2 years and 8 months. The fact that there is still room for upward movement without reaching overbought conditions provides ammunition for another leg up, potentially reinforcing the positive scenario.

Two Year High

  • The 478 HKD level shows the stock is undergoing a healthy retracement, which could signal a setup for a future upward move. During this period, we might expect some sideways consolidation as the price stabilizes before the next potential rally. This consolidation phase often allows the market to regain strength and could lead to a strong breakout when the buying momentum returns, pushing the stock toward new highs.

Contributions

Technical Analysis provided by Tiago Afonso.

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