Tencent Traders Turn Bearish on Alibaba IPO Cash Drain

Bloomberg News

Just a month after bullish bets on Tencent Holdings Ltd. (700) climbed to a record, options traders are reversing their wager as Alibaba Group Holding Ltd. prepares for what will probably be the biggest-ever U.S. listing.

Tencent, a Chinese provider of instant-messaging services and games, is set to be dethroned as Asia's largest Internet company once Alibaba completes its initial public offering this week. For the first time in five months, one-month puts that profit if Tencent shares fall 10 percent cost more than calls. Traders paid 11.7 points more for the bullish options as recently as Aug. 15, the widest premium on record. The shares sank 7.6 percent as of yesterday from an Aug. 5 all-time high.

'With Alibaba's IPO in the pipeline there may be some dilution of interest in Tencent in the near term,' Ben Kwong, a director at KGI Asia Ltd., said on Sept. 10. 'There may be some switching because there's another choice; if you have a more handsome boy coming then of course you might give up your old boyfriend and have a date with the new one.'

Alibaba yesterday boosted the amount it's seeking to raise to as much as $21.8 billion, coming a step closer to breaking a global fundraising record after investors showed strong interest in the shares. China's biggest e-commerce operator may be valued at as much as at $167.6 billion, compared with Tencent's $149 billion.

'Institutional investors may have limits to investment amounts in specific sectors, so they may switch from Tencent to Alibaba,' Sam Chi Yung, strategist at Delta Asia Securities Ltd., said on Sept. 11. 'People are more interested in put options' on Tencent, he said.

Option Costs

One-month puts cost 0.6 points more than calls on Sept. 11, the first time they were more expensive since April 11, according to data compiled by Bloomberg. This year, bullish options have cost an average 3.9 points more than bearish contracts.

Tencent shares have surged by more than 15,000 percent in the 10 years since listing on optimism that increasing Internet use in the world's most populous nation will boost earnings.

The Shenzhen-based company's second-quarter profit jumped 59 percent from a year earlier as it offered more games and shopping to the billion users of its WeChat and QQ messaging applications, according to an exchange filing last month.

Tencent traded at 37.4 times estimated profits at the last close. That was the second-highest multiple on the benchmark Hang Seng Index (HSI), which traded at 11.2 times projected profit, and compares with 17.3 times on a measure of global information technology companies, according to data compiled by Bloomberg.

High Valuation

'Tencent's valuation is relatively high, even when compared with local players,' said Delta Asia's Sam. 'People may be seeing Tencent as a market leader now, but after Alibaba's listing investors will have more choices.'

Chen Limin, a spokeswoman for Tencent in Shenzhen, declined to comment.

Short sales accounted for 30 percent of trading in Tencent shares on Sept. 12, the most since May, according to data from the Hong Kong bourse. Short-sellers borrow stock and sell it, hoping to buy it back at a lower price and pocket the difference.

Alibaba's IPO may help Tencent once it starts trading by spurring demand for Internet shares, according to Benjamin Tam, a Hong Kong-based portfolio manager who helps oversee about $1.5 billion at IG Investment Ltd.

'At the moment Alibaba's prices are a bit conservative so people are probably switching out from Tencent,' said Tam. 'If Alibaba opens much higher then Tencent will probably follow.'

Cautious Approach

Investors fell over themselves in 2007 to pile into the listing of Alibaba.com Ltd., with Hong Kong individuals placing orders for 257 times the amount of stock available. Shares almost tripled on the company's trading debut, with volume so high that it caused order delays. Alibaba.com, which connects manufacturers with overseas wholesale buyers and was delisted in 2012 at its IPO price, is a unit of the entity that's now set to list on the New York Stock Exchange.

Alibaba plans to set a final price for the shares on Sept. 18, with trading to begin the next day. Founder Jack Ma told prospective investors in Hong Kong yesterday that he won't seek too high a valuation, two people who attended the meeting said.

The HSI Volatility Index, which measures the cost of options on the Hong Kong gauge, rose 1.1 percent to 16.34 today. Just two of the seven most-owned options on Tencent yesterday were bearish, according to data compiled by Bloomberg. Even after retreating from their August peak, the shares gained 25 percent this year through yesterday.

'There's probably collateral damage coming from Alibaba,' Richard Harris, chief executive officer of Port Shelter Investment Management, said on Sept. 11. 'But don't forget Tencent has had a fantastic performance. It's probably vulnerable to a pullback.'

To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net Tom Redmond

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