To The Moon

1. Just not long ago$TENCENT(00700)$ Tencent announced it was divesting JD and it caused JD share price to tank. Yesterday, Tencent sold $3b worth of$Sea Ltd(SE)$ Sea shares at $208 each. Sea share price dropped 11.4% to $197.84.

2. Tencent's stake in Sea has declined from 21.3% to 18.7% after the sale. Tencent will be restricted to sell Sea shares during the next six months. But I believe the divestment will continue thereafter, adding more selling pressure Sea shares.

3. This means that Tencent can raise another US$20.52 billion if it eventually divest everything at today Sea's market cap.

4. With the current $3b sale in Sea and $16.4b sale in JD.com, Tencent is sitting on $19.4b cash. As of 30 Jun 2021, Tencent had $38.8b in cash and deposits. So this is a significant cash injection into the company.

5. Why is Tencent doing this? Tencent has always been investing in startups and has built up an impressive venture portfolio. My suspicion is that it is due to the ongoing regulatory pressure and Tencent's stakes in numerous successful Chinese enterprises are seen as anti-competitive.

6. If this is true, Tencent will have to unwind more investments in the coming months. The next likely candidate would be Pinduoduo since it is also an ecommerce player like JD.com and Sea. Tencent has a 15.63% stake in Pinduoduo. A complete divestment at a share price of $49.82 would raise $9.8b for Tencent.

7. After Pinduoduo, the next target would be Meituan. Another major platform player in China. Tencent has 17.18% stake that would be worth $27.1b.

8. After the e-commerce ones, the next group would be the online streaming platforms. First up would be Kuaishou. Tencent has 17.32% stake worth $6.4b.

9. Next would be Huya and Douyu where their merger was blocked by the government. Tencent has 47.2% and 37.21% in Huya and Douyu respectively. The combined value unlocked from a possible divestment would be just $1b.

10. And don't forget about Bilibili where Tencent has a 11.38% stake. That would raise another $1.8b.

11. There are even more investments that Tencent may be 'forced' to divest eventually but I would think these are the major ones to prevent anti-monopolistic behaviour and creating a walled garden around this group of companies.

12. The impact is a mixed bag. The positive thing is that Tencent is unlocking its massive venture portfolio and realising the gains. With all the divestments above, we are looking at a total of $86b cash going into Tencent's pocket. That's 10% of Tencent's market cap today or 35% of its total assets. Depending on how they book these investments in the statements, it could be a substantial gain in their earnings and book value.

13. The negative things include: Selling these investments at much lower prices than before the regulatory clampdown started. Tencent could have waited for a better time to realise these gains. More importantly, Tencent would lose influence in this 'consortium' of companies that it has built up over the years. And what to do with the $86b cash if further investments would draw attention to more anti-monopolistic behaviour?

14. I suppose a huge special dividend can be looming for Tencent shareholders and that could give some respite to the depressed share price currently. I see it more of a short term good but long term competitive situation for Tencent.