Asia Tea Time - Cup 4 ☕

March 24, 2023 • Estimated Reading Time: 8 minutes

This week, we cover news on the SVB collapse and Credit Suisse, Tencent, and TikTok’s CEO Shou Zi Chew.

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In case you missed it, I wrote about why nobody buys Asia-focused ETFs. You can

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Macro in Asia

Credit Suisse takeover puts Asia banks in the spotlight

Following Silicon Valley Bank’s rapid collapse, the contagion spread to Europe where a rescue deal for Credit Suisse was reached over the weekend – seeing UBS take over its banking peer for US$3.2 billion.

Why it’s happening

  • You know when you say you don’t need help but it’s so obvious you really do? In the banking world, that’s a sign you’re about to go bust.

  • Credit Suisse had been treading water for a while now. It graciously repaid shareholders’ faith in it by posting a record loss of US$8 billion for the whole of 2022.

  • If even the Saudis (who buy football clubs for fun) aren’t willing to invest more money in you, you’re in trouble. And that’s exactly what was announced, leading to a market freakout.

Why it matters

  • The wipeout of Additional Tier-1 (AT1) bondholders – who are supposed to be senior in the pecking order to shareholders – caused post-traumatic stress to a lot of extremely wealthy people.

  • Banking contagion is just a pain for everyone. Thankfully, in Asia our banks’ big flex is their sufficient capital buffers.

  • The Swiss are supposed to be the world’s bankers, right? Well, by screwing bondholders, they’ve forced central banks in Asia to come out and say they won’t pull the same sort of stunt.

What’s next?

  • Deutsche Bank hasn’t been in the headlines for a while but the market didn’t want to make it seem like it’s been left out. The bank’s shares plunged on Friday (24 March) on worries of contagion.

Tim’s Take

  • Asian banks are well-capitalised and managed when you compare them to their European and US brethren.

  • In fact, Singapore’s largest bank – DBS Group (SGX:D05) – has seen its share price hold up since the whole Silicon Valley Bank saga kicked off.

  • Since 8th March, when fears around SVB really started to surface, shares of the Singapore bank are pretty much flat.

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Banks in the region are also treated much more like utilities. They’re heavily regulated and conservatively run – that leads to a lot less of the gung-ho lending you’ve seen in Europe and the US.

Company spotlights

Tencent shares rally on a return to growth

Shares of Tencent Holdings (SEHK:0700), the world’s largest gaming company, soared nearly 12% this week on Q4 2022 earnings that saw its revenue growth claw back into positive territory.

Why’s it news?

  • Tencent has been a darling of China-focused investors until it got whacked by Chinese regulators. But apparently they don’t see gaming as “spiritual opium” anymore.

  • While Tencent has advertising, fintech, and cloud businesses too, it’s also looking into how it can leverage the big ol’ Artificial Intelligence (AI) narrative.

Why it matters?

  • It’s been traditionally known as a growth company, so returning to revenue growth – even if it was a pathetic 1% – was cause for mild celebration.

  • A deep freeze on gaming approvals by Chinese regulators hit Tencent and its competitors hard. A resumption of these approvals is proving positive for Tencent, given it’s the Big Daddy of gaming in China.

What’s next?

  • After distributing shares of Meituan Dianping (SEHK:3690) to its shareholders as a special dividend, investors may still be pondering what else Tencent could divest next.

Tim’s Take:

  • Tencent had been a phenomenal growth stock for nearly 20 years up to 2021. However, its future is a lot less bright after the 2021-2022 crackdown by regulators.

  • Of course, the market’s memory is short. Tencent’s share price is up nearly 100% from its lows in late October but we shouldn’t forget that gaming can’t exactly be viewed in a positive light by China’s thought police – no matter what rhetoric the government comes out with.

  • You've also got to contend with China's reopening. Who's going to want to stay in and play games all day? That's showing through in its domestic gaming revenue, which fell 6% on the year in its latest quarter and was down 11% from the previous quarter.

  • Investors are also seeing this sort of post-Covid normalisation in other gaming businesses across the region, with Sea Ltd (NYSE:SE) a particularly relevant example.

  • Fine, Tencent's international gaming revenue did see growth but how realistic is it that governments around the world will let a Chinese gaming company acquire meaningfully given the deep chill in the geopolitical environment?

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For investors, the longer-term danger is that Tencent might become more of a regulated utility – operating in industries that aren’t supported by the government but which are laden with cumbersome regulations and lower operating margins.

Story of the week

TikTok is addictive and Americans are hooked. That’s spooked US senators and they got a chance to grill TikTok’s CEO Shou Zi Chew .

One of the highlights of that congressional hearing has got to be a US senator asking:

“Does TikTok access the home Wi-Fi network?” (See the moment here)

Drawing looks of bewilderment from Chew, clueless questions like this seem par for the course when tech bosses are grilled by US politicians.

It also raises more interesting questions about whether TikTok will have to be sold off at some point in the not-too-distant-future.

If that is forced through, it will just exacerbate the already-tense relationship between the world’s two superpowers.