Tencent a conviction buy for Goldman Sachs despite regulatory worries

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Tencent Holdings has been added to the conviction list by analysts at Goldman Sachs (NYSE:GS), who said the Chinese tech conglomerate offered a “compelling risk-reward” despite concerns regulators could train the guns on the online gaming sector.


In a note published on Wednesday, the investment bank highlighted that the company’s share price was currently down 22% in the year-to-date, however, they said that this decline represented a “most attractive” opportunity mirroring the scenario in 2018 when worries over Tencent’s core gaming business sent the stock down 45% before rebounding.


READ: Tencent and other gaming shares slide after China condemns ‘electronic drugs’


“In light of the stacked risk-reward with 73% upside and committed investments toward long-term growth, we reiterate our Buy rating on Tencent and add it to our Conviction List”, Goldman said.


Analysts also flagged that Tencent’s 58 game-related investments will help drive growth in its overseas gaming revenues and “impact earnings positively” despite what they said would be a “more moderate pace” of domestic Chinese game revenue growth due to the increased regulatory scrutiny.


Tencent shares took a hammering earlier this week alongside other online gaming companies in China after a state-run media outlet unleashed some stinging criticism of the industry.


The Economic Information Daily, run by the state-owned Xinhua News Agency, called online games “spiritual opium” and “electronic drugs”.


In an article that was picked up by Bloomberg, the publication pointed to a student who reported their schoolmates played a popular Tencent game for eight hours a day.


Shares in the company plunged sharply in the wake of the story, which was interpreted by many analysts as a warning that online gaming could be the next target of Chinese regulators, and while the stock recovered in the following days the firm’s New York-listed shares are still down around 6.7% since Monday at US$57.49.

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