Why Did Tencent Shares Soar 33% in the First Half of 2020?

What happened

Tencent Holdings Ltd (SEHK: 700), the online gaming giant and WeChat operator, has seen its shares have an absolutely stunning first six months of 2020.

The company’s share price finished 2019 at HK$375.60, racking up an around 20% gain for the full calendar year.

However, in just the first six months of 2020, Tencent’s shares were already up 33% as its stock price closed on 30 June at HK$498.60.

What’s all the more impressive is that this positive showing has come amid the global Covid-19 pandemic that initially hit China and led to a nationwide lockdown in the first quarter.

Tencent shares have also easily outperformed Hong Kong’s Hang Seng Index, which actually declined nearly 14% in the first half of 2020.

So what

Tencent’s sensational first-half performance was not down to luck. The company has been a big beneficiary of the “stay-at-home” trend that investors have been playing given the impact of Covid-19.

Online gaming has been one activity that has seen a spike in activity as China’s 1.4 billion people went into lockdown in the first quarter of 2020.

Given that Tencent derives the majority of its revenue from online gaming, and being the world’s largest online games developer, it was no surprise that investors sought shelter in Tencent shares.

For the first quarter of 2020, the uptick in Tencent’s gaming revenue was strong. It raked in RMB 37.3 billion (US$5.31 billion) in revenue from gaming over the first three months of the year, up 30.8% year-on-year.

Its gaming division also made up 35% of its total revenue during the quarter. This highlights how important online gaming remains to Tencent’s business despite its fast-growing (and exciting) fintech, cloud and social advertising divisions.

What’s more, investors also got excited about Tencent’s plans to expand its domestic gaming dominance by going international. The success that it has built at home is by no means a sure thing overseas.

However, Tencent partnering with other wildly-popular and talented games developers in international markets means it stands a good chance of constructing a sizeable international business over time.

Now what

Questions will obviously be asked about whether Tencent can sustain its lightning-speed rally. The company’s shares closed at an all-time high of HK$524.50 last Friday (3 July) but actually finished down on Monday despite a massive rally in the Hong Kong market.

Some investors may be taking profits on the company given its extraordinary run so far in 2020. However, for long-term investors, the growth opportunities in front of Tencent still remain as exciting as they did at the beginning of this year.

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