Tencent shares suffer correction

Dow Jones – Shares of Chinese tech giant Tencent Holdings logged their first correction of 2017, falling more than 10% from their latest record high set last week after briefly surpassing Facebook in market value.

The development comes during this week’s global pullback in tech stocks, particularly those which have recorded big 2017 gains.

On Wednesday, the S&P 500’s tech sector suffered its third-worst trading day of the year while the Philadelphia Semiconductor Index slid 4.4%, its biggest decline of 2017.

Tencent, the company behind the popular messaging app WeChat, has been one of the biggest beneficiaries of the booming tech sector in Asia.

Its Hong Kong-listed shares have still more than doubled this year despite the 11% pullback from its recent high. Last month, it became the first Asian tech company to see its market capitalisation reach $500 billion.

Concerns

The stock surge has helped fuel concerns that shares have become overheated. There has also been worry about whether Tencent’s steady string of strong earnings results will be sustainable.

Tencent shares were down 2% Friday afternoon, trading some 40 times projected earnings for the next 12 months, according to FactSet. That is about its highest forward multiple since 2014.

Sean Darby, chief global strategist at Jefferies in Hong Kong, is recommending investors rotate out many of the tech highfliers. They include the FANG stocks of the US—Facebook, Amazon.com, Netflix and Google parent Alphabet —as well as Asia’s so-called BAT stocks—Baidu, Alibaba. and Tencent.

“The market appears to have moved to excessively owning a few winners,” Darby said. “This is not the time to own all of them.” Should the declines continue, he added, the risk is that a “sell-off could be quite violent.”

Index moves

Index moves have also helped fuel some of the Tencent selling. Following the close of trading Friday is the semi-annual rebalancing of indexes compiled by MSCI. There will also be changes, effective Monday, in Hong Kong’s Hang Seng Index, of which Tencent has become the biggest component this year with its stock surge.

The Hang Seng benchmark theoretically limits any stock to comprising 10% of the index, but Tencent has recently approached 12% after its price gains. The changes on Monday will include two new companies joining the 50-stock index, which will move Tencent back to a 10% index weighting.

Tencent’s shares have jumped 40% since mid-year and its market cap is double the next-biggest stock in the Hang Seng, banking group HSBC. The latter also makes up 10% of the index.

Profile

Tencent, the world’s largest videogame publisher by revenue, is best known in China for its WeChat and QQ messaging and mobile-payment apps, which are installed on almost every PC and smartphone there.

The company has lifted its international profile too, with several big deals in recent years. It recently purchased a 12% stake in Los Angeles social-media company Snap, becoming one of its largest shareholders. It also bought a 5% stake in Tesla earlier this year.

It’s all resulted in the stock becoming a global favourite, with investors buying every dip this year. The last time Tencent entered correction territory, defined as a decline of 10% from a recent high, was the 18% drop seen from September to December 2016. A drop of at least 20% is typically considered a bear market.

Regional tech stocks have been the biggest drivers of Asian stock benchmarks, thanks to their outsized weighting in those indexes. While they helped propel a number of Asian indexes to multi-year or record highs in 2017, this week’s weakness has exposed the benchmarks’ vulnerability.

Korea’s Kospi has fallen 2.7% this week as Samsung Electronics—which makes up more than 20% of that index—slumped 8.4% following a start-of-week Morgan Stanley downgrade on concerns about memory-chip pricing and valuation worries about the stock.

Despite being poised to log its worst week in 5 ½ years, Samsung shares are still up 41% this year.