Tencent SDRs fall nearly 7% after US designates tech giant as ‘Chinese military’ firm

TENCENT’S Singapore-listed shares, or Singapore Depository Receipts (SDRs), fell nearly 7 per cent on Tuesday (Jan 7) morning after the US categorised it as a “Chinese military” company.

The US Department of Defense included the Chinese tech giant on a list of “Chinese military companies.” This means that the US defence agency is prohibited from procuring goods and services from the companies on this list, according to the US’ National Defence Authorization Act of 2004.

US and Hong Kong-listed shares of Tencent also tumbled in tandem. American depositary receipts shares of Tencent fell nearly 8 per cent overnight, while its Hong-Hong listed shares were down 6.8 per cent by the end of morning trade.

On Tuesday, Morningstar said it does not see a material impact on Tencent’s cash flow.

However, it added: “At present, the CMC designation does not impose specific sanctions or direct penalties. However, inclusion in the list may result in reputational damage and could discourage other companies from collaborating with Tencent and its subsidiaries.”

Tencent is one of the largest Chinese companies, and owns businesses including gaming and social networking, as well as fintech, cloud computing and advertising.

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Tencent’s earnings exposure to the US is in the “high single digit” percentage range and stems primarily from its gaming revenue, according to Morningstar.

“While this represents the maximum potential downside, we see it as highly unlikely that Tencent’s US gaming revenue will be affected over the near term,” it said.

“Finally, investment restrictions – such as requiring US persons (including individuals and institutions) to divest Tencent shares – would only take effect if an executive order imposes such measures,” said Morningstar.

“We view the likelihood of this scenario as very low for Tencent, given that it is not a state-owned company and is absent from major military projects,” it added.

Morningstar said it’s maintaining its fair value estimate for Tencent’s Hong Kong-listed shares at HK$704, adding that its shares are undervalued.

Tensions surrounding tech between the US and China have taken centre stage in their relations over the past few years. That includes the US taking aim at China’s semiconductor industry by restricting critical tech exports to China.