Russo Buy Update: NetEase and Tencent

One Chinese gaming giant has performed well, while the other has slumped.
Anthony RussoOct 09,2020,20:39

Gaming has been one of the hottest industries this year with people staying indoors and turning to the virtual world. For this reason, I have been extremely bullish on the gaming segment this year.

In August, I went ahead and reviewed Chinese gaming titans NetEase (Nasdaq: NTES; HKEX: 09999), and Tencent Holdings (HKEX: 07000; OTC: TCEHY) which have been leading the gaming surge in the nation.

But keep in mind, there was a sell-off in early September on fears of overvalued tech firms—which even spread to the Asian markets. Let’s take a look and see how Tencent and NetEase have performed since I reviewed them in August.

Tencent Gaining Despite Reported Increased Trade Tensions

Starting with Tencent, I recommended buying its over-the-counter stock in August despite the tech giant being at the center of escalating Sino-U.S. trade tensions.

While the future of Tencent’s WeChat remains uncertain in the U.S.—it likely won’t have a big impact on the company’s revenue going forward despite the America representing a huge potential market. Currently, Americans represent only 2% of WeChat's over one billion users.

Tencent could face more fire from the U.S. According to a report from Bloomberg earlier this week, Tencent along with Jack Ma’s Ant Group could face possible restrictions in the United States due to national security concerns over their digital payment systems.

At this point, it’s unclear what will happen, but Trump could sign a new executive order banning Tencent's playment platforms, similar to the previous ban on Tiktok. However, that ban was halted by the courts which might prompt the Trump administration to try another approach.

It’s also important to note that the report by the news outlet has not impacted Tencent’s stock for the time being. Shares of Tencent’s U.S. stock are now up 9% to date since I recommended the buy in late August.

Siince then, Tencent has made deals involving two Chinese U.S.-listed firms in September. First, it reportedly has taken full ownership in one of China’s largest game streaming platforms, Huya (NYSE: HUYA). Then, Tencent struck a deal to buy out the search engine platform Sogou (NYSE: SOGO) from parent (Nasdaq: SOHU).

Turning towards its financials, its latest quarterly report looked solid. In the second quarter, Tencent's revenue surged 29% year-over-year to 114.9 billion yuan ($16.2 billion), which beat projections by 2.2 billion yuan.

NetEase Slumps

I haven’t been as lucky with Tencent’s gaming rival NetEase since I recommended buying NetEase’s Hong Kong shares in August.

Just last week, NetEase implemented a five-for-one stock split in efforts to make its U.S. shares attractive to more traders. Ahead of the split, analysts were predicting big gains over the next 12-months. But so far that hasn’t happened.

While I recommended a buy on NetEase’s Hong shares in August, both of its stocks have been on a downward slope since then.

However, I remain bullish on NetEase going forward. For one, NetEase is coming off a highly anticipated Hong Kong listing late in the second quarter, which brought in $2.7 billion.

Also, its second-quarter earnings were strong. In the second quarter that beat analysts’ projections, NetEase posted revenue that hit 18.18 billion yuan, ($2.57 billion) up 26% year-over-year on earnings per share of ¥39.82. Analysts polled by were calling for revenue of 17.02 billion yuan on EPS of ¥32.12.

Shares of NetEase in Hong Kong have dropped 6% since late August.

Should you Focus on Hong Kong?

Sino-U.S. trade tensions are a concern when looking at Chinese-U.S listed firms like Tencent and NetEase. Regarding Tencent, I would not worry too much about potential WeChat ban in the U.S., but keep an eye on the possible new restrictions the U.S. could place on the company, nonetheless. Still, it’s unclear how significant of an impact it would have on the company going forward.

Washington has also threatened to delist Chinese firms from trading on their bourses if they fail to comply with U.S. auditing standards. However, it is hard to imagine Washington forcing two large multi-billion dollar firms off their markets. (That is, if you consider the OTC market a real market at all). To avoid this anxiety completely, open a brokerage account overseas if you don't have one and trade their Hong Kong shares.

As gaming continues to boom, I would look to buy some of both NetEase’s and Tecent’s shares (on whichever market). Put aside the trade tensions for now. These companies have a bright future and I say, "Game on."

Topics:NetEase, Tencent, Buy, Sell