Tencent Sinks on Valuation Amid Biggest Stock Swings Since 2011

Apr 04, 2014 4:30 am ET

April 4 (Bloomberg) -- Tencent Holdings Ltd. fell to a two- month low while volatility in the shares rose to the highest level since December 2011 amid growing concern that Internet companies are overvalued.

Tencent slid as much as 6.3 percent to HK$512, before paring its drop to 3.9 percent at the close in Hong Kong. The stock has lost 17 percent since March 6, after a 1,266 percent surge during the previous five years sent its price-to-earnings ratio to a six-year high. Naver Corp. declined 1.6 percent in Seoul, while Kingsoft Corp. sank 4.5 percent.

A measure of volatility in Tencent has almost doubled in the past six weeks as the stock swung by more than 3 percent on a closing basis 10 times during the period. Investors are trying to judge how much Asia’s largest Internet company is worth after fourth-quarter net income trailed analysts’ estimates on higher costs for its WeChat messaging service and competitor Alibaba Group Holding Ltd. moved closer to an initial public offering.

“Tencent has been totally loved,” said Stuart Beavis, head of institutional equity derivatives at Vantage Capital Markets in Hong Kong. “Stocks can’t go up forever. Investors are probably looking at what Tencent’s true valuation is.”

Rising volatility in Tencent is spurring options traders to increase bets on the stock. Open interest in Tencent put and call contracts reached a record high of about 688,000 at the end of last month. They accounted for two of the five most-traded options in Hong Kong today, according to data compiled by Bloomberg.

Alibaba IPO

The Bloomberg Asia Pacific Internet Index fell 2 percent today, paring its gain during the past 12 months to 56 percent. The MSCI Asia Pacific Index has risen 4 percent in the same period. Technology companies led gains in Asian shares during the past 12 months on speculation growing demand for social networking, e-commerce and online games will boost earnings and fuel takeovers in the industry.

The Internet gauge is valued at 28 times estimated earnings for the current fiscal year, more than twice as expensive as the broader regional index and near the biggest premium since 2006, according to data compiled by Bloomberg. Tencent has a multiple of 34, down from 42 on March 6. It lost about $26 billion of market value in the period.

Alibaba, China’s biggest e-commerce business, has kicked off the process for what may be the largest U.S. initial public offering in two years. Investment banks value the company, founded by former English teacher Jack Ma, at as much as $200 billion, which would make it the second-biggest Internet stock by market capitalization behind Google Inc.

Tencent’s share-price decline “is mainly due to profit- taking,” Kevin Tam, an analyst at Core Pacific-Yamaichi International in Hong Kong, said by phone. “In the longer term, competition from Alibaba is a potential risk because they have similar business focus. I foresee an increased degree of competition between the two Internet giants.”

--With assistance from Jasmine Wang in Hong Kong.