Event description: on December 23, 2021, Tencent Holdings Limited (00700hk, "Tencent") announced that it would pay a special interim dividend by distributing 457326671 class a ordinary shares of JD group (09618hk, "JD SW") in kind. The record date of this dividend distribution is January 25, 2022. For each shareholder holding 21 Tencent shares, one JD SW share will be distributed. Tencent indirectly holds about 529 million JD SW shares through huangriver, which is recorded as Tencent's investment in associates. 457 million shares to be distributed are equivalent to about 86.4% of jd-sw shares held by Tencent and about 14.7% of the total issued shares of jd-sw on December 21, 2021; Based on the closing price of HK $279.2 of jd-sw on December 22, 2021, the market value reaches HK $127.7 billion. After the dividend, the share of JD SW held by Tencent will be reduced from about 17.0% to about 2.3%. In addition, Mr. Liu Chiping, executive director and President of Tencent, has resigned as a director of jd-sw with effect from December 23, 2021.
Opinion comment: for Tencent, we think it has limited impact on its business. At the end of the third quarter of 2021, Tencent's investment in associates reached RMB 369.4 billion, while the loss attributable to associates and joint ventures in the third quarter of 2021 was RMB 5.7 billion. Therefore, Tencent's investment in associates in the balance sheet will be significantly reduced; Based on the low net interest rate of jd-sw, its impact on Tencent's net profit is limited. On the one hand, we believe that this is a reasonable move in the current environment of strict antitrust and supervision of the Internet industry. On the other hand, we believe that Tencent's investment will focus more on the industrial Internet than entertainment and media. According to the data of the third-party data company eneniu, as of December 22, 2021, Tencent has publicly invested in 224 companies, of which 84 belong to the enterprise service sector.
For jd-sw, this is regarded as a reduction of Tencent Holdings Co., Ltd., which may cause short-term fluctuations in jd-sw's share price. After the dividend distribution, Tencent will hold about 2.3% of the total equity of jd-sw, up from 17.0%. Meanwhile, according to JD SW announcement, the strategic partnership between Tencent and JD SW has not changed. JD SW has signed a strategic cooperation agreement with Tencent since 2014 and renewed it in 2019. It is expected to expire on May 27, 2022. Therefore, we expect that the existing cooperation and traffic support with Tencent will remain unchanged at least until the expiration of the agreement. Meanwhile, according to the latest information disclosed by jd-sw, most of the voting rights are still in the hands of JD management. Even if Tencent is the major shareholder of jd-sw, Tencent has only 4.6% of the voting rights. Overall, despite the reduction of major shareholders, we believe that the fundamentals of jd-sw are still stable. Tencent's reduction may not cause significant changes to the operation and financial status of jd-sw. However, this may cause investors to worry about the success of the renewal of the cooperation agreement next year, which is only an uncertainty at present. At the same time, we expect that the share price of JD SW may fluctuate in the short term due to the increase of stock liquidity in the market.
Investment suggestion: our current investment rating of Tencent is "buy", and the target price is HK $650.00. On the other hand, we believe that the reduction will not have a significant impact on the operation and finance of jd-sw, but due to the increase of stock liquidity in the market, the stock price may fluctuate in the short term. We maintain the investment rating of jd-sw as "collection" and the target price is HK $385.00.
