Deep Dive into Tencent Holdings (TCEHY)

In the interest of full disclosure, (TCEHY) currently represents around 10% of my investment portfolio. This concentration naturally exposes me to potential cognitive biases, such as confirmation bias, wishful thinking, and perhaps even overconfidence. I actively try to mitigate these biases and maintain an objective perspective on my investment thesis.

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Intro

Tencent Holdings is more than just a company; it's a digital ecosystem that has profoundly reshaped how people in China and beyond connect, communicate, and consume. From its humble beginnings as a messaging service, Tencent has blossomed into a multifaceted tech giant, its tentacles reaching into gaming, entertainment, fintech, and beyond. This constant evolution, driven by a deep understanding of user needs and a relentless pursuit of innovation, has not only transformed the company itself but also the digital landscape of China and beyond…

Tencent is not just a fascinating tech giant; it's also a compelling investment opportunity. The market’s pessimism, fueled by regulatory changes and economic concerns has caused the stock to fall to a near record low valuation.

But don't let the headlines fool you. Tencent's core business remains incredibly strong. With over a billion monthly active users on WeChat and QQ, the company is deeply embedded in the daily lives of Chinese consumers. Their gaming division continues to dominate globally, with titles like Honor of Kings and PUBG Mobile generating billions in revenue. And with WeChat Pay leading the charge in mobile payments, Tencent's fintech arm is reshaping the financial landscape.

Moreover, Tencent boasts a management team with a proven track record of shrewd capital allocation. They consistently invest in core businesses, explore innovative technologies, and, importantly, reward shareholders. Their ongoing share repurchase program signals their confidence in the company's long-term value and commitment to increasing shareholder returns.

Tencent's financial foundation remains rock solid; $25B in TTM FCF (3Y FCF CAGR of 31.74%) and analysts forecasting a 5Y revenue CAGR of ~15% and adjusted earnings CAGR of ~17% paint a picture of a company firing on all cylinders. With $50B in cash/cash equivalents, Tencent has the resources to weather any storm and invest in its future. And yet, it trades at a very attractive ~15x NTM FCF.

While it's true that investing in Chinese equities carries inherent risks, the market seems to have already priced most of those risks in. For investors willing to look beyond the headlines, Tencent offers a rare combination of growth potential, inherent value, and a proven track record of success.

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1. Company History