Betting on Tencent Rally Post-Earnings Is a Profitable Play

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Tencent Profits Nearly Double But Costs Are Soaring

Tencent Holdings Ltd. investors will likely be celebrating tomorrow, if history is a guide.

The Chinese tech giant announced its fourth-quarter earnings on Wednesday after Hong Kong’s equity market closed. Tencent’s results typically provoke an outsized rally -- the stock climbed an average 1.8 percent on the day after the company’s quarterly releases in the past five years, compared with a gain of just 0.1 percent for the Hang Seng Index, data compiled by Bloomberg show.

Tencent’s quarterly profit beat analyst estimates, almost doubling to a record 20.8 billion yuan ($3.3 billion) as mobile game blockbusters and a growing advertising business helped rake in revenue. Analysts have got ahead of a post-earnings bounce: Goldman Sachs Group Inc. on Monday hiked its 12-month price target on Tencent stock by 22 percent, while Morgan Stanley boosted it by 10 percent.

Given the company’s track record as one of the world’s best performing stocks in the past decade, bears are hard to find. Still, with a market value of $574 billion, and the biggest weighting on MSCI’s Asian benchmark, any misstep could be costly. The options market is implying a post-earnings move of 3.8 percent either way, which would make it the biggest earnings-day reaction since a 7.1 percent rally in August 2015.

The stock closed down 0.9 percent in Hong Kong.

— With assistance by Sofia Horta E Costa

(Adds Tencent earnings in third paragraph, updates share price.)
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