Tencent (TCEHY) shares fell almost 4% on June 27 after its largest shareholder announced a plan to shrink its stake. Tencent is one of China’s top technology companies alongside Alibaba (BABA), Baidu (BIDU), and JD.com (JD). It runs a diversified business spanning video game publishing, social media, and cloud computing.
Prosus to Reduce Stake in Tencent
The Dutch multinational conglomerate Prosus (PROSY) plans to sell some of its shares in Tencent to raise money to fund its stock repurchase program. Prosus owns a stake of 28.9% in Tencent. The shareholder has not revealed the size of the sale or the timing of the disposal. However, it expects the sale to have a limited impact on Tencent stock.
In 2021, Prosus sold 2% of its Tencent stake and raised $15 billion. It promised not to sell its Tencent shares again for the next three years. Therefore, the latest sale plan suggests a change of heart at Prosus, and investors will be watching closely to see how that move affects the Tencent stock.
Market Undervalues Prosus
Prosus is a division of South Africa’s Naspers (NPSNY). The proceeds from the sale of Tencent shares would go towards funding the repurchase of both Prosus and Naspers shares. In the buyback, Prosus executives seek to capitalize on a market inefficiency that has resulted in the company’s being valued below the value of its Tencent stake. In addition to the Tencent stake, Prosus has other businesses spanning food delivery, online classifieds, education software, and fintech.
Wall Street’s Take
The Street is cautiously optimistic about Tencent stock with a Moderate Buy consensus rating, based on one Buy versus one Hold. The average Tencent price target of $44 implies 6.8% downside potential from current levels. Shares have declined about 35% over the past year.
TipRanks data shows that financial blogger opinions are 96% Bullish on TCEHY, compared to a sector average of 65%.
Key Takeaway for Investors
Prosus and Naspers have said they remain confident in Tencent’s long-term prospects. Therefore, Prosus’ reversal to sell Tencent shares sooner than it had committed has nothing to do with concerns about the Chinese company’s future. Tencent and other Chinese technology companies are just emerging from a government crackdown on the sector, suggesting that regulatory headwinds in the near future may be limited for now.
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