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An expert disclosed that Tencent has no plans to exit from other investments since they are not as developed as JD.com.
Chinese gaming and social media company Tencent (HKG: 0700) plans to weaken its ties with e-commerce firm JD.com (HKG: 9618) as it announces to pay out $16.4 billion of its stake to shareholders. This means its shares in the China’s second-largest e-commerce company would be reduced from 17% to 2.3%, and losing its largest JD.com shareholder’s position to Walmart. Walmart holds 9.3% of JD.com shares.
It is speculated that the decision has to do with the recent regulatory crackdowns of technology companies in China. The speculations come from the recent decision by the Chinese regulators to block a $5.3 billion proposal by Tencent to merge with the top two video game streaming sites. The regulators ordered Tencent to end an exclusive music copyright agreement. This has somehow been rubbished by the company which invested in JD.com in 2014.
According to them, they have the right to withdraw their investment since the company has reached the stage where it can finance its growth.
Mio Kato, a LightStream Research analyst believes that this is just a continuation of the concept of increasing competition. “This seems to be a continuation of the concept of bringing down the walled gardens and increasing competition among the tech giants by weakening partnerships, exclusivity, and other arrangements which weaken competitive pressures,” he said. “It could have implications for things like the payments market where Tencent’s relationships with Pinduoduo and JD have helped it maintain some competitiveness with Alipay,” he added.
The disinvestment raises concerns about whether the social media platform will also withdraw from its partnership with the likes of Pinduoduo Inc (NASDAQ: PDD) and Meituan (HKG: 3690). However, an expert disclosed that Tencent has no plans to exit from other investments since they are not as developed as JD.com. Also, he stated that the e-commerce giant resorted to the distribution of the shares as dividends rather than selling them to avoid high tax bills and a steep fall in the JD.com share price.
Kenny Ng, an analyst at Everbright Sun Hung Kai. also mentioned that the decision of Tencent will have a long-term impact on the JD.com business. According to him, there is a high possibility that Tencent shareholders will sell their JD’s shares as dividends will increase.
According to Alex Au, managing director at Hong Kong-based hedge fund manager Alphalex Capital Management, the decision to distribute the JD.com shares makes business and political sense. “There might be other divestments on their way as Tencent heeds the antitrust call while shareholders ask to own those interests in minority stakes themselves,” he said.
Technology investor Prosus (PRX.AS), which has 29% shares in Tencent and appears as the largest shareholder, will receive the biggest portion of JD shares.
The JD shares price reacted to the news with the biggest daily percentage decline since June 2020 on Thursday with a 11.2% fall. However, it made some recovery to a 7% decline, while the Tencent shares rose by 4%.