To The Moon

On April 13th, the Hong Kong Stock Exchange documents showed that Tencent Holdings (00700) reduced its stake in Kuaishou-W (01024) from 20.46% to 19.02%, causing a stir in the market. Tencent later explained that its investment entity PNI, which indirectly controls Tencent Plus Partners (TPP), distributed Kuaishou Class B shares totaling 51.16 million shares to some external capital partners in physical form at their request and free of charge. PNI is jointly invested by external capital and Tencent with TPP's assistance, so PNI's shareholding decreased by about 1.4%, while Tencent's total shareholding of 17.96% (excluding TPP) remained unchanged.

Kuaishou currently has a market value of HKD210 billion. From the perspective of holding cost, as early as 2017 and 2018, Tencent twice invested in Kuaishou with valuations of USD4.5 billion and held stakes of approximately 20% and about 3.3%, respectively; In Q2 of 2018, it invested USD600 million into Kuaishou again; based on this cost calculation, the current return is more than six times.

However, the last round of strategic financing before IPO was conducted at USD28.6 billion valuation which is currently loss-making for investors despite this fact market still gave nearly a five percent drop to Kuaishou stock price underperforming compared to broader markets.

Why are Kuaishou shareholders scared?

The Hong Kong Stock Exchange has unique requirements for reducing holdings announcements: for major shareholders who have not dropped below a new integer percentage point threshold (such as dropping from above twenty percent to nineteen point nine percent), they must make an announcement accordingly; therefore,Tencent made such an announcement because its affiliated party had just crossed one integer percentage point threshold due to reduction in holdings by external parties' requests . Otherwise, sudden reduction of holdings by major shareholders would have a negative impact on the secondary market stock price. However, even though Tencent has responded, there still seems to be some after-effects.

The market is more concerned that Kuaishou will follow in the footsteps of JD Group-SW (09618) and Meituan-W (03690) and distribute dividends. In December 2021, Tencent distributed approximately 460 million shares of JD to its shareholders; in November 2022, it distributed about 948 million shares of Meituan. The impact of reducing holdings mainly comes from more large shareholders selling out their stakes completely like Naspers(Tencent's largest shareholder in South Africa)(NPSNY), which has sold all its JD and Meituan stocks held causing certain impacts on stock prices but does not necessarily mean they will perform worse than broader markets as these companies are industry leaders with important performance indicators. At the same time, JD also initiated a buyback program which partially offset the effect of reducing holdings.

If Kuaishou is reduced by Tencent Holdings , then its "business relationship" with Tencent may become even more delicate because Jingdong's e-commerce business and Meituan's takeaway and store businesses do not conflict with Tencent's main strategic business layout for now . But Kuaishou’s short video directly competes with what Tencent values most - “Video Number” commercial system. Moreover,Tencent has WeChat’s natural traffic flow that can provide Video Number with continuous resources.So if Tencent distributes Kuaishou stocks,it may make investors feel like it is "letting go"of a competitor in short videos.In 2022,the number of daily active creators and daily average video uploads increased by over 100% YoY,and the number of creators with over ten thousand fans grew by308%,while content receiving over one hundred thousand likes increased by186%.It has become an important increment for Tencent in advertising.

We believe that Tencent's "distribution" of Kuaishou is also a high probability event

1. Tencent itself faces pressure from major shareholder reduction and needs to reduce selling pressure;

2. Tencent maintains a cooperative relationship with Kuaishou, which will not exceed the long-term business competition relationship with Meituan and Jingdong;

3. It is also an opportunity for Kuaishou to seek a second growth curve.

$TENCENT(00700)$ $KUAISHOU-W(01024)$ $JD.com(JD)$ $JD-SW(09618)$ $Meituan(03690)$ $Naspers Ltd.(NPSNY)$