In the face of continued industry restrictions in China, a high-performing fund has decided to reintroduce Tencent Holdings Ltd. TCEHY to its portfolio based on the company’s appealing valuation.
What Happened: The Federated Hermes Asia Ex-Japan Equity Fund, which has outperformed 83% of its peers over the past three years, recently bought Tencent shares, reported Bloomberg on Thursday. Despite the Chinese government’s release of a draft rule on gaming limitations in December, the fund manager, Jonathan Pines, is optimistic about the market in China, which he believes has “absolutely incredible” valuations.
Once Asia’s second-most valuable company, Tencent saw a significant decrease in its market worth due to the new regulations. However, its shares are still trading at a very low price. The fund’s purchase of Tencent expresses its confidence in the Chinese market and its attractive valuations.
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While China may not be the preferred investment destination for many, Pines believes that the potential rewards outweigh the risks. The fund, which is also overweight on South Korea, favors Samsung Electronics Co. in the Asia semiconductor space over Taiwan Semiconductor Manufacturing Co. (TSMC). Pines pointed out that TSMC is due for a cyclical downturn, and its shares trade at almost five times book value, while Samsung’s earnings are expected to recover.
Why It Matters: This move comes after China’s top gaming regulator introduced new draft rules before Christmas to control excessive spending and online gaming usage. The announcement led to an $80 billion market selloff, with Tencent taking a $54 billion hit. The regulations include spending limits on in-game purchases, bans on rewards for frequent log-ins, and prohibiting content that compromises national security. This sudden crackdown sparked fears of a renewed clampdown on China’s internet sector.
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