Tencent Holdings (TCTZF) , the videogame maker and operator of Chinese superapp WeChat, continues to rationalize its investment portfolio, with its latest move coming as it sold down a portion of its stake in Singapore-based game maker and e-commerce operator Sea Ltd. (SE) .
Sea started life making videogames but has branched out to operate the e-commerce site Shopee, which has boomed during lockdown.
Tencent (HK0700) is raising US$3.0 billion by reducing its holding in Sea from 21.3% to 18.7% with the sale of 14.5 million Class A shares. Tencent sold the shares at US$208, according to a term sheet seen by Reuters. That means Tencent sold the shares at the lower end of the US$208 to US$212 indicative range.
Tencent is also going to convert its more-powerful Class B shares into Class A shares. The sale of stock and change in class mean Tencent's total voting power will fall below 10%. That change could be important as it might help to rid the two companies of any suspicion of conflict of interest surrounding their development of competing videogames.
Tencent last month said it would sell 86.4% of its holding in the Chinese e-commerce site operator JD.com (JD) . Tencent opted to return the cash from the sale of 457.3 million shares in JD (HK:9618) to shareholders in the form of a special dividend. At the Hong Kong share price of HK$279.20 at the time of the sale announcement, the sale would be valued at HK$127.7 billion (US$16.4 billion).
Tencent is also reducing its holdings in other companies at a time that the Beijing government has been pressuring Chinese Big Tech companies. One of the Chinese Communist Party's main concerns is anticompetitive behavior by Chinese Internet and technology operators. The walled-off Chinese Internet space has split into investment camps, where Tencent has a stable of companies that are its investment universe. It's not uncommon for such companies to require investors to concentrate share ownership only in their stable of companies if they want access to future hot stock offerings in that stable.
Tencent said it is unlocking a portion of its gains in Sea, which has seen its share price quintuple from US$39.30 at the start of 2020 to US$197.84 as of the start of Wednesday's trading in New York. Tencent said it plans to retain the "substantial majority" of its equity stake in Sea for the "long term" and will be locked up from selling any more Sea shares for six months.
With the JD sale, Tencent said its original intention was to invest in JD and other companies while they're in the development stage. JD, the second-largest e-commerce platform in China behind Alibaba Group Holding ( (BABA) and HK:9988), is clearly well past that point. Tencent and JD say they will continue their "strategic partnership" in terms of business operations.
Sea shares sink
Tencent shares declined 4.3% in Hong Kong trading on Wednesday, underperforming the Hang Seng Index, which fell 1.8%, and mainland shares, with the CSI 300 down 1.0%. Tencent's decline comes after Sea shares sank 11.4% in New York the day before, taking them from US$223 to below the Tencent sale price.
Sea is due to hold its annual general meeting on Feb. 14 in Singapore. It is proposing a change to the voting power of its Class B shares so that each will be worth 15 votes, up from three. After Tencent's sale, all the Class B shares will be held by Sea's founder, chairman and CEO, Forrest Li. Tencent in any case had signed a proxy agreement in 2017 handing over all the voting power in its Class B shares to Li.
Li recently owned 54% of the voting control over Sea, which is rising to 57% after the Tencent sale. Sea's special resolution requires approval by 75% of the shareholder votes. Li and Tencent said they approve the change. Holders of Sea shares as of Jan. 14 will be eligible to vote. Each of the company's American Depositary Shares is equivalent to one Class A share.
Li founded Sea in 2009 under the name Garena in order to make online videogames, and it is sometimes dubbed the "Tencent of Southeast Asia." The Singapore company modeled itself on Tencent in its early days, with the Shenzhen company licensing its "League of Legends" game to Sea. But Sea has since branched out into digital payments with AirPay as of 2014, launching Shopee in 2015, then the SeaMoney subsidiary to oversee AirPay and ShopeePay mobile wallets. That means Sea shares some similarities with Alibaba, with Alibaba's Taobao and Tmall Web sites and Alipay service.
Sea continues to make games such as the battle royale "Free Fire" under the Garena studio name. They're offered for free on app stores, such as those of Tencent, with both companies making money from microtransactions within the games.
Sea shares hit an all-time closing high of US$366.99 on Oct. 19. They have since shed 46% of their value as they closed at $197.84 in New York on Tuesday, though that still leaves investors sitting on a nearly 400% gain since the start of 2020.