Event: Tencent announced that it would distribute about 460 million class a ordinary shares of JD group held by it to shareholders in the form of in kind distribution as a special interim dividend. Tencent eligible shareholders will receive 1 class a ordinary share of JD group for every 21 shares held. Meanwhile, Liu Chiping, executive director and President of Tencent, resigned as a director of JD. After the distribution, Tencent's shareholding in JD will be reduced from 17% to about 2.3%.
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Potential related factors of Tencent's distribution of JD shares as special dividends: or including business decision-making and response to antitrust and financial holding policy considerations
1) From the perspective of business decision-making, Tencent's withdrawal from investment at an appropriate time has limited impact on JD's development and the strategic cooperation between Tencent and JD. The form of distribution in kind can not only reduce the tax burden, but also improve the return to shareholders.
2) In December, the central economic work conference mentioned "strengthening anti-monopoly and anti unfair competition" and "setting up a" traffic light "for capital". From the cases of Betta / tiger teeth and Tencent music, as well as the policy guidance of fair competition and interoperability and opening, the business boundary of super platform and the closed ecology of Platform Alliance "restrict" competition or belong to the key direction of regulatory attention.
3) According to the Trial Measures for the supervision and administration of financial holding companies, the equity investment balance of the controlling shareholders of a financial holding company shall not exceed 40% of its net assets. According to Bloomberg, Tencent has the possibility of establishing a financial holding company.
Tencent portfolio Outlook: expand the layout of Tob and cutting-edge technology, and the equity investment in non core consumer Internet may shrink
Tencent has a huge investment portfolio. In 2018, it will upgrade its strategy and expand its industrial Internet investment. In 2011, Tencent established the "flow + capital" two wheel drive strategy, systematically built the investment business, strengthened the leading position in the core field of "social + content", cultivated and supported partner enterprises, supplemented the "connection" strategy of e-commerce, local life and other industries, and gradually formed a broad layout and ecological closed loop in the field of consumer Internet. In 2018, Tencent began to promote the strategic upgrading of consumer Internet to industrial Internet and expand industrial ecological investment in cutting-edge fields.
In the first quarterly report of 2021, the company clearly stated that it would take the initiative to increase investment, mainly covering enterprise services, games and short video content; In May, CSIG announced a new round of architecture upgrading; In November, the digital ecology conference said that more than 20 billion resources will be invested to cultivate partner enterprises in the next three years.
According to it orange, as of December 13, 2021, Tencent (Department) has invested more than 1180 times, of which 251 companies have been invested since 2021, 60 / 52 have been invested in games and enterprise services respectively, and the layout of Tob is obviously strong. As of June 2021,
Tencent's investment portfolio is about 844.3 billion yuan, accounting for more than 90% of its net assets; The fair value of the secondary portfolio exceeds 1.4 trillion.
Looking forward to the follow-up, we expect that on the one hand, Tencent's investment strategy will comply with the enterprise strategic upgrading and invest more in the frontier "hard technology" field; On the other hand, as early-stage investment enterprises grow into mature platforms and business cooperation tends to be stable, it is not ruled out that the equity investment in the non core consumer internet field may shrink.
Potential impact on Tencent: it helps to reduce the valuation allowance of the portfolio, the decline of equity binding or limited impact on the stability of the ecosystem
1) According to the closing price of JD on December 22, the total market value of the shares distributed to shareholders this time is about HK $127.7 billion, with a corresponding dividend rate of about 3%, which not only cashes in the income of some long-term strategic investments for the company's shareholders, but also helps to reduce the market's valuation allowance for Tencent's portfolio.
2) At present, the cooperation agreement between Tencent and JD has not expired (as of May 22), and we believe that the commercial cooperation agreement or platform interoperability policy is not contradictory; moreover, JD (especially Jingxi, etc.) still rely on Tencent's traffic to support differentiated competition with competitors; in the future, the win-win strategic cooperation between Tencent and JD may continue, and the cooperation amount paid by JD may increase under the condition of weakening equity binding. In a pessimistic scenario, if the two sides can't continue their cooperation and video numbers and small programs develop rapidly, Tencent also has the ability to cut in through live e-commerce Opportunities for e-commerce.
3) The direct financial impact is expected to be limited: JD will be transferred from the financial assets recorded in the accounts of associated companies (equity method) to the financial assets measured at fair value and whose changes are included in the profit and loss or comprehensive income. Therefore, Tencent's share of the loss of the joint venture in 2022 is predicted by Bloomberg to increase from 2.1 billion yuan to 4.4 billion yuan. In 2022, Bloomberg predicts that the net profit of non IFRS will be reduced by about 1.5%.
4) If we continue to withdraw from investment in other partner enterprises: we believe that Tencent's social traffic and content matrix provide a solid foundation for its ecosystem. If the subsequent equity binding with other partner enterprises is also weakened, the win-win cooperative relationship that has entered a basic steady state is still expected to continue generally, The decline of ecological stability is relatively limited (it is also difficult for competitors to compete for cooperative enterprises through equity investment). If they withdraw from investment in short-term loss-making enterprises, their share of profits and losses of joint ventures will improve in the short term, but their long-term growth will decline.
Potential impact on JD: there is some pressure on short-term transactions. We are concerned about the renewal of the 22-year cooperation agreement, and it is expected to maintain mutually beneficial cooperation.
1) There is some pressure on short-term transactions. Tencent's U.S. shareholders cannot be allocated JD shares. Tencent needs to replace it by cash distribution by selling JD shares or allocating internal resources. Some investors who receive in kind distribution may sell JD shares. 2) Pay attention to the renewal of the cooperation agreement in 2022. The weakening of equity binding reduces the certainty of JD's wechat traffic advantage to a certain extent. We need to pay attention to the renewal of subsequent strategic cooperation agreements. According to Tencent's statement, we expect that the two sides will probably continue to maintain a mutually beneficial business relationship.
Investment suggestions:
We believe that the financial impact of Tencent's distribution of JD shares is limited, which is conducive to the improvement of Tencent's portfolio valuation. There is a certain pressure on JD's short-term transactions. We focus on the renewal of the cooperation agreement in 2022, which is likely to continue the business mutually beneficial relationship. We expect Tencent to strengthen its investment in tob and cutting-edge technology, and do not rule out the contraction of equity investment in non core consumer Internet. Considering that Tencent's social traffic / content matrix has laid a solid foundation, the business win-win of partner enterprises tends to be stable, or the impact of potential equity changes is limited, Tencent's ecology is expected to remain relatively stable. It is suggested to pay attention to Tencent holdings and JD group.
Risk tip: Internet regulation is normalized, and there are certain uncertainties in policies; Tencent withdrew its equity investment in other enterprises.
