Tencent is distributing $16bn of shares in ecommerce group JD.com to shareholders, in the tech group’s first big move to unlock the value of its vast investment portfolio as Beijing steps up regulatory scrutiny of the sector.
The Shenzhen-based tech conglomerate will start handing out the 460m ordinary shares of JD.com to shareholders in March, cutting its stake from about 17 per cent to 2.3 per cent. Tencent president Martin Lau also resigned from JD.com’s board on Thursday as part of the announcement.
Shenzhen-based Tencent is cutting its stake after Chinese authorities this year cracked down on the country’s tech firms, especially the largest groups such as Tencent and rival Alibaba, which are involved in multiple industries.
China’s antitrust regulator in recent months has repeatedly fined both companies over their past dealmaking activities.
Tencent was “not empire building” nor “trying to amass influence”, and reducing its stake in JD.com helped to make that clear, said one person close to the company. The move was not triggered by any specific request from regulators, the person added.
“As [its] portfolio gets bigger and bigger, the public may start to say where does it end? Does it end with a situation where Tencent owns 20 per cent of every big company in China,” the person said. Tencent “wants people to see that’s not the case”.
The company did not want “to be seen to be exerting massive influence over a huge segment of the economy in perpetuity”, the person added.
Over the past decade Tencent has been one of the country’s most active investors, nurturing hundreds of tech start-ups and slowly accruing a publicly traded investment portfolio valued at Rmb1.2tn ($190bn) as of September 30, equalling roughly one-third of its total market value.
Its most valuable stakes include 16 per cent of ecommerce group Pinduoduo, 17 per cent of food delivery group Meituan and about 18 per cent of short video app Kuaishou. Tencent also holds shares in US companies such as Snap and Tesla.
Tencent said in the future it could begin to exit some of its positions when those portfolio companies matured and no longer needed outside capital.
“The Board believes that JD.com has now reached such a status, and the Board therefore considers that it is an appropriate time to transfer the [shares],” Tencent said.
Tencent’s shares rose 4 per cent in Hong Kong, while JD.com’s shares fell 7 per cent. JD.com’s shares have fared better than its competitors this year as growth remained strong and it mostly avoided the regulatory crackdown.
But the distribution could create further selling pressure for the ecommerce group. Shareholders will receive 1 class A ordinary share of JD.com for every 21 shares of Tencent they own.
Tencent also said it might sell some JD.com shares on the open market to deal with issues concerning fractional shares and regulatory challenges distributing shares to US based investors.
Robin Zhu of Bernstein said investors typically put a 20 to 30 per cent holding company discount on Tencent’s investment portfolio. “Moves like today help to unlock some of that value,” he said.
The person close to Tencent said the distributions were a new tool and a tax-free way to funnel money back to shareholders.