Undervaluation strategy live trading July 14, 2024: Multiple brokerages release Q2 earnings preview for Tencent

Preface: This strategy mainly includes Graham's early classic cigar-butt investment method and the low PE investment method proposed by Graham in his later years, which involves buying stocks with yields greater than twice the risk-free rate.

The characteristic of this portfolio is to hold multiple undervalued stocks in a diversified manner, pursuing stable income while aiming to control drawdowns. The downside is weaker explosive potential, but it excels in stability.

Since this strategy is experimental in nature, it is primarily for my personal research and learning purposes. I have neither the obligation nor the ability to guarantee that this strategy will definitely be profitable. Trading based on this strategy is at your own risk.

1. This Week's Trades

None

2. Returns

This week's return: 3.28%, CSI 300 Index return: 1.19%.

Year-to-date return for 2024: 7.46%, CSI 300 Index return: 1.19%, continuing to outperform the CSI 300.

3. Latest Holdings

Valuation Table:

4. Key Updates

1. Tencent Enters Quiet Period Next Week, Share Buybacks Paused

Tencent is scheduled to release its 2024 interim report on August 14, which also means its daily 1 billion yuan buyback will temporarily pause next week as it enters the quiet period.

Some friends have asked why Tencent doesn’t apply for an exemption like Kuaishou to conduct buybacks during the quiet period. Let me briefly explain the reason.

On October 27, 2023, the Hong Kong Stock Exchange issued the "Guidelines on Automatic Share Repurchase Plans for Listed Issuers." If an automatic repurchase plan can (1) effectively prevent trading based on insider information and (2) effectively reduce the risk of market manipulation, the issuer may apply for an exemption to conduct repurchases during the restricted period.

One of the detailed rules requires that the terms of the automatic repurchase plan must not be established to circumvent the restricted period. The issuer must consider the timing of establishing the plan and the start of repurchases to determine whether the duration is reasonable and whether a certain interval is necessary.

In plain terms: If a listed company establishes an automatic repurchase plan shortly before the quiet period and terminates it shortly after the earnings announcement, the exchange may suspect the plan was set up to bypass the rules.

For example, Kuaishou-W disclosed a 2.5 billion HKD automatic share repurchase plan on December 18, 2023. According to the announcement, Kuaishou signed an irrevocable automatic repurchase plan with independent broker Morgan Stanley, which would make decisions on repurchases based on preset parameters and market conditions, thereby preventing both parties from trading on insider information.

Additionally, the repurchase period lasted from December 19, 2023, to May 24, 2024—a span of five months that included Kuaishou’s expected 2023 annual report release period. This also prevented Kuaishou from potentially trading on upcoming earnings.

In contrast, Tencent’s 100 billion yuan repurchase plan is decided by the board and implemented by the company’s finance department. If it were to execute an automatic repurchase plan through an investment bank for just one month during the quiet period, it would violate the exchange’s rule against establishing plans to circumvent regulations.

Now, some might worry: Without Tencent’s daily 1 billion yuan buyback support during the quiet period, will the stock price fall?

I can only say it might fall—or it might rise.

The most recent live example was during Tencent’s one-month quiet period before its Q1 report on May 14. Many friends sold early as usual, expecting the stock to drop during the quiet period so they could buy back later. At the time, I countered: "Does no buyback necessarily mean the stock will fall? Not necessarily. Let’s wait and see."

This time, the script didn’t follow the usual pattern. During the quiet period, Tencent’s stock suddenly surged 15% in a week. Many friends were shaken off and couldn’t buy back in.

Tencent’s stock has risen 36% year-to-date, performing strongly. Last Friday’s closing price of 397 yuan is close to this year’s high of 400 yuan on May 17. I suspect many friends looking at the K-line chart might be tempted to "take profits."

But for me, I make buy/sell decisions based solely on fundamentals and valuation. At the current price, the P/E ratio for the core business is under 20x, still far from my sell point. So whether the stock rises or falls this month, I’ll hold steady. If it drops significantly, I might even add more.

2. Tencent Q2 Earnings Preview

Perhaps anticipating market volatility during the quiet period, multiple top domestic and international brokerages issued Q2 earnings preview reports for Tencent after the market closed last Friday. This was likely organized by Tencent’s investor relations team to brief select brokerages on Q2 performance.

Based on the disclosed previews, Tencent’s Q2 revenue growth is expected to be between 6%-8%, with non-IFRS net profit growth between 25%-34%. Revenue growth remains slightly sluggish, while profits continue to grow strongly.

Of course, as investors, we must be clear-eyed: This pattern of low revenue growth and high profit growth is unsustainable. Aside from the impact of high-margin product mix, it’s also due to the low base in H1 2023. With a higher base in H2, profit growth is expected to moderate.

3. Fu Shou Yuan Research Visit

This week, I visited Fu Shou Yuan for another research session. There’s a lot to cover, so I’ll post a separate article next week. Here’s a brief summary:

1. IR updated this year’s full-year guidance to 10%-15% YoY growth. I confirmed again that this is relative to 2023, not 2021.

If the 15% growth mentioned at this year’s earnings call was also relative to 2023, then the latest guidance has lowered the lower bound.

That said, my earlier forecast assumed 10%-12% growth. Given last year’s high base in H1, I’d be satisfied with 10% growth for the full year.

2. During my chat with IR, she mentioned seeing my article on Snowball. I also shared market concerns about the company holding excessive cash, which could lead to impulsive investments or misuse. IR said dividends will continue, and buybacks are also planned.

3. Regarding the additional 20% dividend tax for Southbound Stock Connect shareholders, IR said the company’s major shareholders hold HKD accounts, so they hadn’t noticed this issue. They may consider it in the future.

4. Currently, the company’s dividend withholding tax is 10%. They are negotiating with relevant authorities to reduce it to 5% for Hong Kong shareholders.

That’s all for now.

Once again, a risk reminder: This live portfolio experiment is solely for my personal investment research. The stocks or funds mentioned are not recommendations or suggestions. I have neither the obligation nor the ability to guarantee this strategy will be profitable. Trading based on it is at your own risk.

$TENCENT(700.HK) $FU SHOU YUAN(1448.HK)

Source: Wei Wei Kun Lun Xia