Tencent Climbs as Buyback Spurs Bets Recent Rout Overdone

Tencent Holdings Ltd. gained for the first time in five days after the company bought its own shares in the open market, spurring speculation that a $32 billion rout in the stock during the past month was overdone.

Tencent climbed 1.6 percent to HK$509.50 at the close in Hong Kong, after a 21 percent tumble from its March 6 record sent the shares to a two-month low yesterday. Asia’s largest Internet company purchased HK$76.7 million ($9.9 million) of shares yesterday, according to an exchange filing today.

“The share buyback is definitely a positive signal for investors as this means the company is optimistic about the future, else it wouldn’t have bought them now,” Hu Jiaming, an analyst at Capital Securities Corp. in Shanghai, said by phone. “The stock fell the past few weeks because it rallied too much before and there were over-expectations on what it could deliver. However, fundamentals are still good.”

Internet companies have paced declines in global equities during the past month as investors sold the biggest winners of the bull market on concern valuations had climbed to excessive levels. The rout has drawn out buyers including Templeton Emerging Markets Group’s Mark Mobius, who said in an interview yesterday he’s been adding to technology stocks after valuations at companies such as Tencent dropped to “reasonable” levels.

Too Small

While Tencent traded at a 178 percent premium versus the MSCI Asia Pacific Index based on estimated earnings yesterday, that was the smallest gap since January and down from 241 percent in March. The shares, which had a market value of $121 billion yesterday, may climb about 26 percent in the next 12 months, according to the average price target of 33 analysts compiled by Bloomberg.

The stock’s 14-day relative strength index fell to 36 yesterday, near the 30 threshold that some traders view as a sign shares are poised to rally.

The size of the buyback is too small to have a major impact on investor sentiment, according to Benjamin Tam, a Hong Kong-based portfolio manager at IG Investment Ltd., which oversees about $1.5 billion. About HK$5.7 billion of Tencent shares changed hands yesterday, more than 70 times greater than the size of Tencent’s repurchase, according to data compiled by Bloomberg.

“Maybe they are trying to support the share price, but the amount is so small relative to the daily turnover that I’m not too keen on the news,” Tam said. “It’s only helping sentiment in the short term.”

Tech Performance

Tencent last bought back stock on April 12, purchasing 620,400 shares for about HK$155 million, exchange data compiled by Bloomberg show. The stock has more than doubled in the past 12 months, versus a 4.1 percent gain in Hong Kong’s Hang Seng Index and a 51 percent advance in the Bloomberg Asia Pacific Internet Index.

Patterns in Tencent’s trading volume suggest the shares may still be in a downward trend. In the five days when the stock price dropped the most in the last two months, an average of 11.9 million shares were traded, compared with just 7.74 million for the five biggest up days.

“A trend confirmed by increasing volumes is a higher quality trend and vice versa,” said Ayush Nagaraj, a sales trader at Sanford C. Bernstein & Co.

Before it's here, it's on the Bloomberg Terminal.