Emerging market stock of the day: Tencent Holdings (emergingmoney.com)

18 August 2012 15 h 32 min Comments Off

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Chinese social media giant Tencent Holdings (TCEHY, quote) was down early in Wednesday trading ahead of its earnings report for the first half of 2012 to be released later today.

Should you consider taking advantage of the dip in this Chinese internet firm?

As a result of pre-earnings profit-taking, Tencent was down more than 2% in early Hong Kong trading, although it would later recover in the afternoon. However, this temporary dip was not necessarily Tencent-specific; the Hang Seng (EWH, quote) endured a rather poor trading day, finishing down 1.3% on the back of concerns over slowing global growth and its potential effect on earnings in companies from all sectors.

It does stand to reason that Tencent may suffer a temporary slowdown in growth as a result of dipping GDP numbers in Mainland China. The vast majority of its users are Mainland Chinese and the company’s value-added services could suffer if middle-class consumers start pinching their pennies.

However, any pullback in Tencent, even one that stems from lower than expected first half earnings, could be treated as a buying opportunity for investors with a long-term time horizon.

Tencent is both the established social media player in China, as well as a company willing to embrace innovation. Its instant messenger service, QQ, is ubiquitous; while instant messenger services went out of fashion in the developed world years ago, QQ remains the go-to chat interface for young Chinese. In addition to its instant messenger service, Tencent runs more sophisticated social networking platforms like qzone, similar to Facebook.

Tencent has also taken advantage of the Chinese online dating craze with a matchmaking site of its own. Online dating websites are taken very seriously in China, and with fewer outlets than their developed market counterparts to find potential mates, dating sites like Tencent’s Lianai and NASDAQ-listed Jiayuan (DATE, quote) are well-positioned to thrive going forward. The industry is expected to grow from its current estimates of about 1.2 billion yuan in revenue to 2 billion yuan by 2014.

While Tencent very well may miss its earnings this week, possibly lower than last quarter, weakness in the stock could be a long-term buying opportunity as the company remains the preeminent player in the secular growth story of perpetually increasing and lucrative online interaction in China.

Source: emergingmoney.com (15/08/2012)

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