Asia Tea Time - #86 ☕

Author

Tim Phillips
January 12, 2025 • Estimated Reading Time: 5 minutes

This week I talk Tencent apparently being a Chinese military company and why political risk in investing is something we all need to be aware of.

Macro in Asia

The US government said it had added Tencent Holdings (SEHK: 700) to a list of companies that it says works with the Chinese military.

Tencent shares in Hong Kong fell over 7% the day after the announcement and ended the week down over 10%.

Why it’s happening

  • The current US administration is departing soon and, like the Trump administration before, they’re not exactly huge fans of the Chinese government – deciding to slap this designation on Tencent (as well as battery maker CATL) before it leaves office.

  • Typically, this list is used by the Pentagon to identify “Chinese military companies” that are a threat to US national security.

  • Of course, anyone from the Department of Defense (DOD) in the US – which the Pentagon operates under – has most likely never used WeChat or played Honor of Kings. Putting Chinese companies on US sanctions lists, though, can have an immediate impact on share prices.

Why it matters

  • With the Trump administration set to take office in less than 10 days, this latest move ramps up the tensions between the US and China before a big presidential transition of power.

  • Tencent is still China’s largest company by market cap – valued at HK$3.41 trillion (US$436 billion) – and therefore any news impacting the large Hong Kong-listed company has knock-on effects.

What’s next?

  • It will be interesting to see how this anti-China rhetoric, when it comes to tech, continues with Trump taking office. More importantly, investors should look to whether viral video app TikTok – owned by Chinese firm ByteDance – is banned in the US.

 

Tim’s Take

This is part of a pattern for US-China relations, with many Chinese firms being targeted for being loosely associated with the Chinese government. It’s also a great way to chop off tens of billions in market cap from listed Chinese companies.

The US government has form in this department. Remember back in 2022, when Hong Kong-listed biotech firm WuXi Biologics (Cayman) Inc (HKEX: 2269) was placed on an Unverified List (UVL) by the US Commerce Department? That led to the company’s shares plunging by close to 33% on the news.

It hasn’t really recovered since. Following on from that classification, WuXi’s shares are now down 78% from early 2022.

Of course, that’s not likely to happen to Tencent. For one, the addition of the company to the blacklist is purely semantics, i.e. Tencent faces no real sanctions of any sort by being blacklisted and, anyway, it doesn’t export any physical goods.

Many analysts are calling this a “buy the dip” moment as Tencent is actually one of the most robust tech companies in China in terms of free cash flow and the quality of its business. Tencent shares finished 2024 over 40% higher.

For many investors in China, though, this could be another sign that the market remains extremely exposed to geopolitical tensions that is beyond the control of any Chinese company.

Tim’s Money Tip of the Week

When we invest in individual stocks, we take on a range of risks. There’s obviously investment risk (in the company) as well as concentration risk – it’s much riskier to buy an individual company’s shares than that of a broad-based market ETF like the S&P 500 Index.

Beyond that – as we’ve seen in action this week – there’s also another key risk we have to factor in; political. This is mainly to do with China and Hong Kong-listed companies but, with Trump coming into power again in the US, it’ll certainly be less predictable for specific sectors in the US market too.

This political “risk premium” is high for China and Hong Kong right now as investors have to be willing to bear higher political risk as it relates to any random announcements or sanctions from the US government (or the broader West).

So, it’s important that we remember the political risk that’s increasingly involved in investing, if we do happen to buy larger cap companies in Asia. That’s because no big company is immune from it – as Tencent shareholders have discovered.