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(Bloomberg) – Tencent Holdings Ltd. collapsed after a global boom in the stock that pushed its market value to the edge of $ 1 trillion for the first time.
The Chinese internet giant lost as much as 5.5% in Hong Kong on Tuesday, placing its market capitalization below $ 900 billion. Traders took profits after Monday’s 11% surge, which was Tencent’s largest in nearly a decade. Comments from a Chinese central bank adviser to local media added to the caution, indicating that excessive liquidity and extremely low borrowing costs were creating bubbles in the stock market.
Read more: China asset bubble warning threatens Hong Kong stock market frenzy
The prospect of China tightening financing conditions threatens to derail Tencent’s stock rally, which has been supported by a relentless flow of capital from the mainland. Onshore funds bought a record number of Hong Kong stocks this month, with around a quarter targeting Tencent. With over a billion users on its social media platform WeChat, Tencent is ubiquitous for Chinese investors who do not have access to the Hong Kong shares of rival Alibaba Group Holding Ltd. via stock links.
Tencent was the most recent mega-cap to benefit from investor enthusiasm for the tech sector, with its impending milestone a marker of euphoria sweeping stocks globally. By Tuesday, the stock had added $ 251 billion in January alone – by far the biggest creation of shareholder wealth in the world. Warnings are mounting that easy monetary policy is fueling bubbles in global equities, particularly in the United States, where the gains were led by the Nasdaq.
As investors search for cheaper alternatives, they have piled on Hong Kong stocks. This helped make the Hang Seng China Enterprises Index the best performing among major global benchmarks over the past month.
While Tencent has long been a favorite with investors in Asia, with a return of over 100,000% since its IPO in 2004, there are other risks to the rally.
In 2018, a government crackdown on China’s online gaming industry weighed on Tencent’s top-grossing business, which at the time accounted for around 40% of its revenue. Coupled with the slowdown in the Chinese economy and the weaker yuan, Beijing’s nine-month shutdown on new game approvals contributed to a 22% drop in stocks.
A campaign against monopoly practices since late last year has targeted many industries in which Tencent and rival Alibaba operate, including the online payments industry. But while increased regulatory risk left Alibaba shares about 16% below their October high, Tencent closed at seven new records in the past eight sessions. One factor contributing to the divergence: Alibaba’s stock in Hong Kong is not included in trade ties with mainland stock exchanges.
Tencent would be the second Chinese company to join the trillion dollar club after PetroChina Co., which was briefly worth more than that in late 2007 before collapsing. US tech giants Apple Inc., Amazon.com Inc., Alphabet Inc. and Microsoft Corp. are also worth over $ 1 trillion each, as is Saudi Arabian Oil Co.
Tencent was founded in 1998 by four college classmates and a friend from Shenzhen who designed a Chinese version of the ICQ instant messaging service. Led by “Pony” Ma Huateng – ma means “horse” in Chinese – the company’s chat software has become the primary communication tool for a generation of young Chinese.
Still, Tencent’s push has exceeded all expectations of the most optimistic analysts. The stock’s closing level of HK $ 766.50 on Monday was nearly 10% higher than the 12-month consensus price target set by Bloomberg, the largest spread since 2014.
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