In this episode of Left Brain Thinking, host Chuck Jaffe interviews Brian Dress, CFA, Director of Research at Left Brain Investment Research, about growth investing opportunities in China. They discuss the post‑pandemic landscape, noting both the massive internet user base and the lingering concerns for U.S. investors such as accounting irregularities and limited visibility. Dress explains how Left Brain’s internal securities evaluation platform, Jarvis, has given a green light to Tencent Holdings (ADR TCEHY), describing the company’s $750 billion market cap and its blend of social media, gaming, fintech, cloud, and enterprise services—likening it to a mix of Facebook, Amazon, Google, and Salesforce. The conversation covers headline risks for Chinese ADRs, including delisting fears and trade‑war tensions, and how the new U.S. administration may reduce political risk, potentially allowing multiple expansion. They examine Tencent’s growth drivers: 1.2 billion active WeChat users, popular gaming titles, a cloud business with 1 million paying customers, and expanding fintech and enterprise offerings. Dress highlights Tencent’s consistent 30%+ revenue growth and six consecutive quarters of accelerating earnings, which Jarvis and Left Brain view as a strong investment case. Finally, they outline the monitoring process—quarterly earnings reviews and trend analysis—to determine when the stock’s growth story may be weakening. The episode ends with standard disclosures and promotion of Left Brain’s research services.
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Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Now, last week we spoke with senior analyst Janice Quek about investing in Southeast Asia and the opportunities there. Today we're looking more at China and chatting with Brian Dress, Director of Research at Left Brain Investment Research. And if you want to find out more about their research, you're going to go to leftbrainir.com and they're on Twitter @leftbrainir. Brian Dress, great to chat with you again.
Hey Chuck, it's great to be back here with you and your audience.
Now we always need to remind folks that you guys are growth investors. You are looking for growth wherever it happens. And China, really interesting growth story for years, but now really kind of a doubly interesting growth story. Why? Well, first into the pandemic, first out of the pandemic, and growth is changing because of the pandemic. So let's talk a little bit about the market and what you're finding there, and then move on to a company that you've been looking at that kind of personifies what you're seeing.
Sure, Chuck. We all know China is a vast economy that's growing at a rapid pace. You know, there's been a lot of reticence to invest in China for US investors, and for good reason in some cases. Accounting irregularities have cropped up, and there's not the great visibility that you have generally with US companies. But it's starting to change, and we're definitely looking for opportunities over in China.
For years it's always been, look, the market in China is huge, obviously, just for the personnel. But when you're looking for growth companies, It's not, let's go look at Coca-Cola, which has been available in China for years. It's really, let's dive in at the technology businesses and the service companies and the things that are now getting much bigger market penetration, right?
Yeah, absolutely. You know, there's over 900 million internet users in China, so that's obviously fertile ground for companies. And there's a lot of other markets that are a little bit more mature in the US. You know, cloud computing, social networking, online gaming, and a number of other business verticals that are starting to catch a lot more traction in China. So it makes it a lot more interesting for growth investors like us.
So let's talk about a growth stock in China with shares here and what's on your radar screen.
You know, we always talk about Jarvis, our securities evaluation platform. It's been flashing the green signal for us for Tencent. That's ticker TCEHY on an ADR in the US. Tencent is an enormous company. It's about $750 billion US market cap. They cover a lot of ground. They cover social media, online gaming, a little bit of fintech, cloud computing, online ads. It's a little bit of a blend of a lot of the tech companies that we're familiar with in the US. You know, it's a little bit of Facebook, it's a little bit of Amazon, a little bit of Google, and some Salesforce kind of mixed in there. So It's a very interesting company that seems to be extremely ambitious in their choice to do growth through acquisition.
We've seen trade wars and other issues that have been in the headlines. Is there headline risk here, or was that maybe solved a little bit by what we perceive as the election results at this point?
I think there's been a lot of concern about these Chinese ADRs that trade on the US exchanges. There's been a concern that there's risk for delisting in the US, so investors have been put off by that. And of course, the trade war, which is a little bit less relevant in Tencent's case because most of their revenue comes from China and a little bit from Southeast Asia. But this company trades at a pretty reasonable valuation given the growth in the 30s of around 9 times forward sales, which isn't so high. And we think the reason for that is just what we talked about, which is concern for the risks of the trade war and concern for the status of this stock on the U.S. exchanges. Biden coming in, we think there's going to be a lot less of that risk concern for us. So that tells us there's possibility for multiple expansion here going forward.
As you're looking at that kind of expansion, I mean, this is a stock that has been on a heck of a run this year. It's currently trading above $75 a share, and when the market was bottoming out, it was at about $44 a share. So it's significantly up. That doesn't normally scare you off at Left Brain, but where are we in that growth cycle? Because you talked about the positives, but what do you see as the future growth potential that has you excited enough, or that has maybe Jarvis excited enough to green light this stock?
Sure. So let's just talk a little bit about the business units that are available at Tencent. So they kind of started in the online gaming and the social chat business. They've got some games that even users in the US would know about, League of Legends and Fortnite, which is huge in the US. And then they have social chat. I got to brush up on my Mandarin, but I think it's called Weixin and WeChat, which is the outside of China product. And their social chat has about 1.2 billion active users, so vast opportunities there. So they've started to diversify their business because there's definitely some issues in China. They've had some games that they've released that have been censored by the government, putting their revenues on the gaming side a little a little bit in doubt, but their gaming properties and their social properties are so popular that it's given them a huge captive audience to sell enterprise services. So they're selling a lot of different enterprise services like cloud computing services, financial technology, collaboration software they have called WeChat Work, which is kind of like Slack in the US. And their cloud business already has 1 million paying users. So a huge addressable market there on the enterprise side. That the company's only just getting started and penetrating. So huge growth opportunities, and they're delivering growth in the 30s, and their growth has accelerated 6 quarters in a row, which is something we always look at here at Left Brain.
So would that also be what winds up being some of those things that you put on your radar screen as you buy a stock like this, to say, when we see that growth sting broken, or something along those lines, would that be, as you go into this, what winds up being— this is what I look for to say when it's no longer time to stay there?
Absolutely. You know, earnings is obviously important to any investor. And we are always, for companies that we follow, we probably follow about 50 companies on a continuing basis. So every time the quarter release comes out, we pour over that with one of our analysts and we caution people, you know, sometimes a company will have one bad quarter. That doesn't make a trend. But when we start seeing 2 or 3 bad quarters, we might change our decision-making in a situation like that. So, definitely important to keep following through earnings, but one bad quarter does not a trend make.
And right now it's been multiple good quarters for Tencent, TCEHY. That's why it's gotten the green light from Jarvis and Left Brain Investment Research. Brian Dress, thanks so much for joining me to talk about it.
Thanks, Chuck. It's been great to be with you.
Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations, but they are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm and its services and Tencent and any other stock they follow. At leftbrainir.com. The firm's on Twitter at Left Brain IR. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on again next week. Until then, stay safe, everybody.
