Tencent Extends Internet Stock Rout as Valuation Concerns Deepen

Apr 07, 2014 4:29 am ET

April 7 (Bloomberg) -- Tencent Holdings Ltd. slumped to a two-month low and a gauge of Asian Internet companies erased its advance for the year amid growing concern that valuations overshot earnings prospects.

Tencent tumbled 4.5 percent to HK$501.50 at the close in Hong Kong, paring its gain during the past five years to 698 percent. The Bloomberg Asia Pacific Internet Index slid 3.8 percent, extending its decline from a March 6 high to 15 percent and its lowest level since Dec. 26. SoftBank Corp., which owns a stake in Alibaba Group Holding Ltd., sank 4.6 percent in Tokyo. Naver Corp. declined 6.5 percent in Seoul.

The losses in Asia follow the Nasdaq Composite Index’s biggest retreat in two months on April 4, as investors pare holdings in Internet companies that have led gains in global equities during the past 12 months. The retreat may weigh on investor demand for initial public offerings as Weibo Corp., China’s biggest microblogging outlet, and Alibaba, the nation’s largest e-commerce business, prepare to sell shares in the U.S.

“Internet-related stocks have gotten expensive,” said Pauline Dan, who helps oversee about $153 billion as the Hong Kong-based head of Greater China equities at Pictet Asset Management Ltd.

The Asian Internet measure had gained as much as 14 percent this year on speculation growing demand for social networking, e-commerce and online games would boost earnings and fuel takeovers in the industry. The gauge is valued at 27 times estimated profits for the current fiscal year, more than twice as expensive as the MSCI Asia Pacific Index and near the biggest premium since 2006, data compiled by Bloomberg show.

Relative Value

Weibo is planning to sell shares in the U.S. at levels that fell short of some analysts’ expectations, said Kim Jin Gu, a Seoul-based analyst at NH Investment & Securities Co. The company plans to offer 20 million shares for $17 to $19 apiece, according to a regulatory filing April 4.

At the top of the offering range, Weibo would be worth about $3.9 billion, and be valued at 21 times 2013 sales. That compares with 30 times sales for Twitter Inc., the San Francisco-based microblogging service.

Alibaba has kicked off the process for what may be the largest U.S. IPO 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.

Mobius Buys

Mark Mobius, who oversees about $50 billion at Templeton Emerging Markets Group, said he’s buying technology stocks after the retreat sent valuations to “reasonable” levels.

“If you look at Tencent for example, it’s come down about 20 percent and that’s a pretty good correction,” Mobius, whose Templeton Asian Growth Fund has outperformed 88 percent of peers tracked by Bloomberg this year, said in an interview in Hong Kong. “A lot of people were concerned because of the number of new issues coming in the U.S. market. I think that’s probably coming to an end now.”

The Nasdaq index dropped 2.6 percent on April 4. Large Internet stocks from Google to Yahoo Inc. plunged as investors sold the bull market’s biggest winners. Google Class A shares sank 4.6 percent. Facebook Inc. lost 4.6 percent, bringing its two-day slide to 9.5 percent. Yahoo declined 4.2 percent to the lowest since November.

More than 1 million put options on an exchange-traded fund tracking the Nasdaq gauge changed hands on April 4 as investors sought protection. That’s the most trading in bearish contracts since May 7, 2010, the day after the so-called flash crash erased $862 billion from the value of U.S. stocks in a matter of minutes.

“Some parts of the high-tech space were looking bubbly and overvalued, so there’s some much needed profit-taking going on,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which oversees about 11 trillion yen ($107 billion). “The rout won’t last long, especially considering the U.S. economic recovery is firm. There may be some change where the sell-off in overvalued shares leads to flows into undervalued sectors.”

--With assistance from Sharon Cho in Seoul, Joseph Ciolli in New York and Anna Kitanaka in Tokyo.