September 14, 2016

Valens Equities Weekly Insights and Inflections for September 14, 2016


Each week the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macro insights

Expectations for Tencent to see a reversal in positive ROA’ trends are unwarranted, as both management and analysts are gaining confidence in the firm’s outlook

tencent-stock-chart

SEHK:700 (Tencent) is currently trading at a 24.0x V/E’, which is near historical averages. At these levels, the market is pricing in expectations for declining ROA’, from 115% in 2015 to 80% in 2020, accompanied by 32% Asset’ growth. However, analysts have bullish expectations relative to the market, expecting ROA’ to increase to 141% this year before fading to 132% by 2017, accompanied by 25% Asset’ growth. Moreover, Valens’ qualitative analysis of the firm’s Q2 2016 earnings call highlights that management is excited about the merger of their QQ Music business and China Music Corp., and confident about revenue drivers in their business. Furthermore, analyst estimates have grown over the past year, indicating that they are growing more confident about the firm’s outlook. Given growing management and analyst confidence surrounding the firm’s fundamentals, current market expectations are too bearish and equity upside for Tencent may be warranted.

Market Insights
Most Compelling Long Ideas
FB, ZG, DLTR, DHI, GOOGL
Most Compelling ECF™ Inflections
CRUS, ABC, AYI, WCN, MA

Company Specific Highlights & Insights:
BLDR, BWA, CHK, FLS, FLS, FSLR, HD, JBLU, LB, SWX:NESN, NXPI, PCLN, PSX, SPLS, TEVA, TGT, ULTA

Aggregate ECF™ Trend Analysis:
Management confidence levels continue to be volatile, ranging between 24 month highs and 24 month lows in the past 6 months. In April, Management Confidence spiked higher, but the metric subsequently rolled over in recent months, falling to the low end of its range. This signaling that growth remains elusive, as management teams continue to not be confident enough to invest in their businesses.

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