Why did Tencent distribute $16.4 billion worth of JD.com shares to investors?

Dec 27, 2021 E-commerce

 

On December 23, Chinese internet giant Tencent announced that it would reduce its stake in JD.com and distribute approximately $16.4 billion in JD.com stock as a dividend to shareholders.

After the dividend, Tencent's shareholding in JD.com will drop from 17% to 2.3%, and it will no longer be the largest shareholder, while Tencent President Martin Lau will resign from the e-commerce group's board, the company said.

It is understood that this distribution plan will provide shareholders with flexible options. Tencent shareholders can sell JD.com shares or participate in investment in JD.com shares by continuing to hold JD.com Hong Kong shares.

Eligible Tencent shareholders will be entitled to one share of JD.com for every 21 shares they hold. Non-eligible shareholders will not be entitled to receive JD.com shares, but will receive cash in lieu of JD.com shares for their holdings on the basis of Class A ordinary shares of JD.com for every 21 shares held as of the record date.

In this regard, Tencent stated that after the distribution, it will continue to maintain their mutually beneficial business relationship, including their ongoing strategic partnership agreement. And it still remains confident in JD.com's prospect.

At present, there are no plans to further reduce its stake in JD.com. In addition, Tencent responded that "investing in growth companies" has always been the main strategic direction of Tencent's investment. When the invested enterprises have the ability to continue to raise their own funds, they choose to withdraw their investment under appropriate circumstances, which is Tencent's "long-term investment" strategy and it has never changed.

So, what signal does it release from Tencent's move?

First, JD.com is mature and has the ability to raise funds continuously.

According to the earnings report released last month, JD.com's total revenue for the third quarter was 218.7 billion yuan, up 25.5% year-on-year, exceeding market estimates of 215.61 billion yuan.

Among them, "platform and service revenue" (mainly from advertising and commission revenue of 3P business) reached 16.8 billion yuan, up 35% year-on-year; "logistics and other service revenue" (mainly from outside logistics orders) reached 15.9 billion yuan, up 53% year-on-year.

JD.com's revenue and its growth trends

Second, Tencent adjusts its investment logic.

Tencent is still the well-deserved "king of investment" in 2021. According to Orange IT Solutions data, Tencent (including Tencent, China Literature, Tencent Music, Tencent Cloud and Tencent Zhongchuang Space) has invested in a total of 251 companies this year, among which, it has invested in 60 game-related companies.

In an external speech in 2019, Martin Lau divided Tencent's partners into three major groups: To C partners, To B partners, and partners in the investment field. He stressed that foreign investment has opened up many new areas of To C and To B for Tencent, enabling the company to cooperate with an ecology that is larger and richer than Tencent's.

For now, the overall "ecological" logic of Tencent's investment has not undergone substantial changes.

However, a very obvious trend is that Tencent has started to invest in hard technologies, investing in GPU chip research and development company Moore Threads, and investing in multiple rounds of Enflame Technology, which focuses on neural network solutions in artificial intelligence.

At the same time, Tencent is also prominent in "early stage investment". According to Nikkei Asia, Tencent invested in 163 startups in 2020, with a total investment of more than $12 billion, making it the largest investor in startups among non-financial investment institutions in China, surpassing Alibaba in terms of the number of investments in startups.

The reduction of JD.com's holdings corresponds to the idea that "when the invested enterprise has the ability to continue to raise its own funds, it will choose to withdraw from the investment under appropriate circumstances", which is reasonable from the perspective of financial return on investment.

According to this inference, Vipshop is also roughly in line with the mature definition, and whether Tencent will choose the opportunity to quit after that remains to be verified.

As of March 31, 2020, Vipshop's founder and CEO Eric Ya holds 12.0% of the shares, still the majority shareholder; Vipshop co-founder Arthur Hong holds 6.9%. Tencent's shareholding is 9.3% and JD.com's shareholding is 7.3%.

In the third quarter of 2021, Vipshop's GMV reached 40.2 billion yuan and net revenue exceeded 24.9 billion yuan, an increase of 7.5% year-on-year; on a non-GAAP basis, Vipshop's net profit attributable to shareholders for the third quarter of 2021 was 1 billion yuan. Vipshop has made a profit for 36 consecutive quarter.

 

Vipshop 2020 Annual Report

Third, the power and role of capital need to be re-examined.

In 2008, Tencent and Alibaba successively set up their investment and M&A departments and strategic investment departments, which officially kicked off the venture capital era of China's Internet.

Good corporate investment can also give critical support to the invested company, such as providing orders, helping to improve technology, or relying on a say in the supply chain to reduce costs and increase efficiency. For example, after Huawei's Hubble Investment invested in chip company 3Peak, the latter became the core supplier of Huawei's 5G base station signal chain chips, and orders from Huawei led to a significant increase in revenue and profits.

The growth of the invested company can also feed back. For example, according to the Q3 financial report released by Meituan last year, when the fair value change income brought by its investment in Li Auto Inc. was as high as 5.8 billion yuan, directly driving Meituan's operating profit to exceed expectations in that quarter.

But investments are always probabilistic. In the past third quarter earnings season, Alibaba, Tencent, Baidu, JD.com, Bilibili, Kuaishou, Xiaomi, etc. all confirmed huge investment losses at almost the same time.

There is speculation that it is possible Tencent's divestiture was a pre-emptive move to please regulators, yet the action was deemed positive for the stock. If more divestitures are coming, here's why it could be a boon for Tencent shareholders.

This is an article from WeChat official accounts Alpha Seeker(ID: deep_insights), written by Ya Lan.