Tencent & Fintech – Hot collar.

Tencent is the acid test of CCP intent.

• While Alibaba, Ant Group, Meituan, and so on have all felt the wrath of the regulator (i.e. the CCP), Tencent has so far been left alone and its fate will be a good indicator for what the real motivation of the government is towards big tech and fintech in particular.
• Pony Ma is the founder and CEO of Tencent which is now easily the biggest technology company in Asia.
• Despite this accolade, Pony Ma has been keeping a very low profile over the last few years which has helped his company to escape scrutiny so far.
• The gaming industry was also one of the first to get hit with regulation and as a result, Tencent has learned how to manage its regulatory risk.
• Tencent is a valid target for regulation but because Pony Ma has stuck to his business and not ventured into making political statements or anything else that could be construed as critical of the CCP, he is not viewed as a threat.
• Tencent has some very large and dominant businesses outside of gaming which are a direct threat to the existing state-controlled banking sector and as such are obvious targets given how the regulator has decimated Ant Group (see here).
• However, so far, the regulator has left these businesses alone and I suspect that what the regulator does about Tencent will be the litmus test to understand what its real motivations are:
• There are two real options:
  • First, government: Speech is tightly controlled in China and there is very little tolerance for speech or commentary deemed to be critical of the CCP.
  • Should these criticisms become rooted in the wider population then this would upset the unwritten bargain that the CCP has had with the Chinese people for the last 70 years.
  • This bargain involves the people giving up large parts of their freedom in return for economic prosperity and to be fair to the CCP, it has largely lived up to its end.
  • However, now the speed of improvement is now slowing and the risk of dissent is greater meaning that to hold onto its power the CCP needs to prevent dissent from spreading at all costs.
  • This is why it came down so hard on Jack Ma (see here) who has now become an effective recluse.
  • Ant Group has been crushed but Alibaba let off with a slap on the wrist because Jack Ma has only a passing acquaintance with Alibaba but remains in control of Ant Group.
  • Second, the banking sector: which is dominated by 4 very large state-controlled banks.
  • The emergence of fintech in China dominated by products and services that grew out of AliPay and WeChat Pay is a direct and existential threat to the Chinese banking sector.
  • This is the reason why the sector has performed so badly since 2018 which is when fintech really began to grow in China.
  • Fintech was 27% of Tencent’s revenue in 2020 and this looks set to grow further unless the state intervenes.
  • So far there has been no action taken with the only discussion going on with regard to regulating Tencent’s music business.
• Given Pony Ma and Tencent’s good behaviour, whether the state intervenes in its financial business will be a clear indication of what its real motivations are.
• If it does nothing, then this will imply that its primary motivation is to ensure that dissent against the government does not spread and that its authority remains unchallenged.
• If it intervenes, which I think it will, then this will show that its primary objective with these companies is to protect the existing banking sector and give it time to develop its own fintech offering.
• This will also ensure state control of the crucial financial sector.
• The combination of further intervention in the fintech sector and the ludicrously low valuation of the Chinese banks (thanks to the Alibaba and Tencent threat) is why I hold a position in 3 of the 4 top Chinese banks.
• The shares may go nowhere but they all deliver a 7% dividend yield which is good compensation for the stagnation.
• I think there is substantial downside in Tencent because the example of Ant Group demonstrates that when the regulation comes, it will be devastating.
• I would not want to be holding the shares when that happens.
• I hold Alibaba instead which I think has already more than priced in the regulatory intervention.