Bloomberg News

Tencent Leads Internet Rout as King IPO Spurs Valuation Concerns

March 27, 2014

King Digital Entertainment

Concern that the rally has gone too far and that companies may be overpaying for acquisitions is building after King Digital Entertainment Plc, the maker of the “Candy Crush” smartphone game, tumbled 16 percent in its New York trading debut yesterday. Photographer: Simon Dawson/Bloomberg

Tencent Holdings Ltd. (700) tumbled the most in seven weeks, leading declines in Asian Internet companies amid growing concern that valuations in the industry are overstretched.

Tencent slid 5.9 percent to HK$521.50 at the close in Hong Kong, extending a drop since March 6 to 18 percent after the stock’s price-to-earnings ratio reached the highest in almost six years. Naver Corp. (035420) lost 3 percent in Seoul, while People.cn Co. fell 6.6 percent in Shanghai. SoftBank Corp. (9984), which owns a stake in Alibaba Group Holding Ltd., slipped 1.7 percent.

Technology companies have led gains in Asian shares during the past 12 months on speculation growing demand for social networking, e-commerce and online games will boost earnings and fuel takeovers in the industry. Concern that the rally has gone too far and that companies may be overpaying for acquisitions is building after King Digital Entertainment Plc (KING:US), the maker of the “Candy Crush” smartphone game, tumbled 16 percent in its New York trading debut yesterday.

“The earnings growth of Internet companies and media companies has been quite strong, but obviously everyone knows that their valuations have become expensive,” Khiem Do, the Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management, which oversees about $60 billion, said by phone. “One should expect some profit-taking from the sector. That’s what we’re seeing.”

Valuation Premium

The Bloomberg Asia Pacific Internet Index fell 3.3 percent today to the lowest level since Feb. 5, paring its gain during the past 12 months to 53 percent. The MSCI Asia Pacific Index was little changed in the same period.

The Internet gauge is valued at 28 times estimated earnings for the current fiscal year, more than twice as expensive as the broader regional index and near the biggest premium since 2006, according to data compiled by Bloomberg.

“The Internet names were already pulling back on concern about their high valuations and that process was given more fuel overnight when King dropped below its IPO price,” said You Na, a senior research analyst at ICBC International Research Ltd. in Hong Kong. “The feedback from U.S. investors seems to be that they are concerned and very cautious.”

King Digital suffered the steepest decline of a newly listed U.S. company in more than four months yesterday even after it priced shares at a discount to its major peers. “Candy Crush,” a puzzle game featuring different-colored candies, has 97 million daily active users, the company’s IPO prospectus shows. It accounts for 78 percent of King’s sales.

Alibaba IPO

Alibaba, China’s biggest e-commerce business, has kicked off the process for what may be the largest U.S. initial public offering in two years. Investment banks value the company, founded by former English teacher Jack Ma, at as much as $200 billion, which would make it the second-biggest Internet stock by market capitalization behind Google Inc. (GOOG:US)

There’s no fundamental reason for today’s drop in Asian Internet shares and they’re just following losses in U.S. peers overnight, said David Riedel, the president and founder of New York-based Riedel Research Group Inc. Investor sentiment may improve in coming weeks as the Alibaba IPO refocuses attention on growth prospects in the industry, Riedel said.

Tencent, Asia’s largest listed Internet firm, has lost about $27 billion of market value since closing at a record high in Hong Kong trading on March 6. The company posted fourth-quarter net income that trailed analysts’ estimates this month on higher costs for its WeChat messaging service. Tencent said yesterday it agreed to pay about $500 million for a 28 percent stake in South Korea’s CJ Games.

Facebook Retreat

Shares of Facebook Inc. (FB:US), which agreed to purchase messaging application WhatsApp Inc. for $19 billion last month, fell 6.9 percent in U.S. trading yesterday after announcing another acquisition. The largest social network said it’s buying virtual-reality technology company Oculus VR Inc. for about $2 billion, pushing into wearable hardware for the first time. Facebook shares are still up more than 130 percent during the past year.

“Those stocks have done so well,” David Gaud, a money manager who helps oversee about $120 billion at Edmond de Rothschild Asset Management in Hong Kong, said by phone. “There could be a bit of profit taking on the news of acquisitions.”

To contact the reporters on this story: Sharon Cho in Seoul at ccho28@bloomberg.net; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Richard Frost


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Companies Mentioned

  • KING
    (King Digital Entertainment Plc)
    • $13.79 USD
    • 0.09
    • 0.65%
  • GOOG
    (Google Inc)
    • $571.6 USD
    • 2.40
    • 0.42%
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