- Tencent's 42% decline from its February high setup the stock for its most compelling risk-reward profile since 2018, Goldman Sachs said.
- The decline in Tencent's stock has come amid a regulatory crackdown from Beijing.
- Goldman believes Tencent could surge 73% from current levels and reiterated its conviction list Buy rating.
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The ongoing decline in shares of Tencent sets the stock up for its most compelling risk-reward profile since 2018, Goldman Sachs said in a note on Thursday.
Tencent has fallen 42% from its record high in mid-February, as Beijing authorities crackdown on a number of industries including the gaming sector. But the current crackdown has echoes of a tightening regulatory regime on the gaming sector in 2018, when game licenses were not approved by authorities for an extended period of time.
Tencent's stock went on to more than triple from its 2018 lows, which were sparked by the brief period of increased regulatory scrutiny from Beijing.
Now, a similar setup could be unfolding, as Goldman estimates that Tencent could surge 73% from current levels amid a stricter regulatory stance from Beijing. Tencent has paid an anti-trust fine and recently implemented an age limit for kids spending money in its games.
Goldman observed that Tencent has made 168 investments year-to-date, which is more than double and triple the number of investments it made in 2020 and 2019, respectively. "Tencent is executing on its strategy to narrow the holdco discount by acquiring assets that result in higher earnings," Goldman explained.
"In our view, the risk-reward is the most attractive over multiple years as the share price move year-to-date mirrors 2018 when game licensing issuance came to an abrupt halt," Goldman concluded.
Goldman reiterated its Buy rating for the gaming company and kept it on its conviction list.