Tencent shares plunge as Prosus steps up sales

On indications that its largest shareholder Prosus NV may extend the sale of Tencent Holding Ltd.'s stock, Tencent Holdings Ltd.'s stock price fell by the most in over two months.

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After news broke that Prosus planned to deposit an additional 96 million shares into the city's stock clearing system, typically a precursor to selling, the internet company's shares dropped 5.2% to HK$357.2 in Hong Kong, the biggest drop since late January. The share price of Prosus fell as much as 5.5% in Amsterdam, while the share price of its parent company, Naspers, dropped as much as 3.6% in Johannesburg. 

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There has been a drop in premarket trading for Tencent’s internet peers that trade in the US, with shares of Alibaba Group Holding Ltd. and JD.com Inc. falling by more than 1% each. KraneShares CSI China Internet Fund, an exchange-traded fund, fell by 1.6% during the same period.

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"It is probable that Prosus will accelerate its selling of Tencent shares when they come close to the HK$400 level," explained Steven Leung, an executive director at UOB Kay Hian, in a statement. "Despite Tencent's efforts to offset the market impact of big holders selling their shares every day by buying back their shares, it would be difficult not to be concerned whenever such negative news is released." 

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The Prosus group, an early investor in Tencent through its Cape Town-based parent Naspers Ltd., began its campaign to pare back its stake in the company in mid-2022 as a means to fund the purchase of its own shares by the company. CEO Bob van Dijk has announced that the stock sales are an open-ended process and that those trades will be executed in small chunks of between 3% and 5% of the daily volume of the company. 

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At the end of January this year, Prosus reported that it had sold over 193 million shares of Tencent for net proceeds of $7.2 billion. This reduced Prosus's stake in Tencent to 26.9% from 29% in June 2022. It has been predicted that Prosus' sale and buyback could help bridge the gap between its market value and the value of the assets that it owns, according to analysts.

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“In accordance with our previously announced strategy, we will continue to repurchase Prosus and Naspers shares as part of our open-ended share repurchase program,” a Prosus spokesperson said in a statement.

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In addition to this, Tencent has also attempted to mitigate the slump by buying back some of its stock as a means to mitigate its effects. This round of buybacks, which started on March 27, has resulted in Tencent purchasing a total of 8.3 million shares of the company. In spite of this, the buybacks have not been enough to stem further share price declines due to broader concerns about a regulatory crackdown and Covid's impact on the economy. 

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Despite this week's slide in stock prices, they remain eighty-seven percent higher than their October low following China's measures to reopen its economy. Some of those gains have been contributed to Tencent's plans to develop a ChatGPT-like bot and the resumption of the approval process for new games.

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According to Vey-Sern Ling, managing director at Union Bancaire Privee, Tencent's share price always takes a hit when there is news of Prosus selling. "Despite this, the fundamentals of Tencent are not affected by the sale." 

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Every time Tencent's share price decreases a percentage, Prosus has to disclose its interest in the company to the SEC. There was a time when the investment firm did this in December last year when it sold off a small percentage of its holdings just below 27%. Since June 2022, when the program was implemented, the company has reduced its stake from 29% to 16%.