Last night, $TENCENT(00700.HK) and other companies were included in the 2025 CMC ("National Defense Authorization Act" Section 1260H) "military-related enterprises" list, facing sanctions mainly that the U.S. Department of Defense cannot procure products and technologies from the companies on the list. As Tencent experiences a rare drop, Dolphin Jun briefly discusses:

1. Reasons and Impact of Sanctions

1. This "sanction" has no impact on Tencent's business at all. Referring to the "experience" of companies like Xiaomi, Hesai, and Zhongwei that successfully won lawsuits, Tencent may also have been mistakenly identified as having a subordinate relationship with the Ministry of Industry and Information Technology (possibly just participating in a project of the Ministry), and thus recognized as a "contributor to military-civilian integration."

2. Tencent has the opportunity to appeal, and the process will involve some back-and-forth. Referring to Xiaomi and Zhongwei, it took 4 months from appeal to final victory and removal. Currently, Tencent's official stance is to actively communicate with the U.S. Department of Defense.

3. Although it is highly likely that the misunderstanding can be resolved, in extreme cases, it could be further included in the NS-CMIC list, which would affect investment restrictions from U.S. investors. It is expected that there will be a 60-day window period from being included in the NS-CMIC list to its effectiveness.

2. If there is a "misunderstanding," what is causing the current drop?

1. The worst-case scenario of the aforementioned investment restrictions is not completely zero probability, so some funds (mainly foreign capital) will have a risk-averse mentality (including concerns about poor short-term stock performance leading to a chain reaction of early selling), requiring time to digest the negative news.

2. The current macro environment is weak, along with a "policy vacuum + exchange rate pressure + Trump’s imminent inauguration." Before the two sessions' policy period arrives, expectations are also shifting from strong to weak, and short-term funds' willingness to go long is not strong. Therefore, during the process of risk-averse funds selling, the bullish funds themselves are not strong enough to support.

3. Tencent's Valuation and Trading Logic

1. Tencent currently has a market capitalization of HKD 3.5 trillion, with an expected EV/Non-IFRS NP of 13x for 2025, which is at a historical low. Although the valuations of Chinese concept stocks are under pressure, Tencent's valuation is clearly low and does not reflect the premium of being a leading company like its U.S. counterparts.

2. The fundamentals are not in decline; there are highlights in both the short and long term.

1) This year's highlights mainly include WeChat e-commerce, including the synergy of video accounts, small stores, etc., as well as opportunities brought by Gen-AI within the group (advertising, cloud, etc.) and cost reduction and efficiency improvement (content cost optimization, personnel efficiency). 2) In other core businesses, domestic games may experience slightly slower growth due to a high base, but the pipeline is not lacking, and new games like "Delta Operation" are performing well, maintaining around the 10th place in Steam's online player ranking, and consistently staying in the top 10 of the iOS free list on mobile. In the payment business, besides e-commerce bringing incremental growth, the focus is on the recovery of offline consumption and the proactive promotion of consumer loan businesses like installment payments.

3. Regarding shareholder returns, Tencent has repurchased a total of HKD 112 billion in 2024. Yesterday marked the first repurchase for 2025, and the repurchase intensity has not weakened. During the subsequent appeal process, it is possible that the company will increase the repurchase intensity to hedge against the impact on stock prices.