Thread by @frankinvesting

Thread/ $TCEHY back-of-envelope valuation.

Since the IPO in 2004, Tencent has returned ~45% annually to shareholders, turning $1 into $553.

Let's have a brief look at what returns could look like moving forward over the next 5yrs...

1/

Let's start with a base case.

@JordsNel from Vineyard Holdings put in the hard work with his deep-dive that I highly recommend. He shared the est. global industry 5Y growth rates weighted against Tencent's revenue (see below).

Jordan's weighted avg. growth rate was 14.6%

2/

Let's round that up to 15% which is still conservative considering China's CAGR in each industry is likely to be above the global avg.

Additionally the capital allocation from Pony Ma & management + the dominant market positioning is likely to lead to much higher returns

3/

Base case (2021-2026)

- Revenue CAGR 15%
- Investment portfolio CAGR 15%
(includes investments from FCF on top of IRR)
- 25% FCF margin
- 20x FCF multiple (core business)

Base case 5Y annual return: 15%

4/

Bear case (2021-2026)

- Revenue CAGR 10%
- Investment portfolio CAGR 5%
(includes investments from FCF on top of IRR)
- 20% FCF margin
- 15x FCF multiple (core business)

Bear case 5Y annual return: 1%

5/

Bull case (2021-2026)

- Revenue CAGR 20%
- Investment portfolio CAGR 20%
(includes investments from FCF on top of IRR)
- 30% FCF margin
- 25x FCF multiple (core business)

Bull case 5Y annual return: 27%

6/

If we weight the probabilities of each scenario 25/50/25 then $TCEHY expected return over the next 5Y is 14.5%.

I would argue that is conservative, i'd personally weight the bull case at ~30% and bear case at ~10%. I was purposefully pessimistic in all scenarios.

7/

I'm currently writing a ~3000 word deep-dive on $TCEHY for my newsletter in which I tackle the valuation with more accuracy and a more realistic return.

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