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Tencent Leads Internet Rout as King IPO Spurs Valuation Concerns 2014-03-27 04:52:17.817 GMT

By Sharon Cho and Kana Nishizawa March 27 (Bloomberg) -- Tencent Holdings Ltd. headed for its biggest tumble since 2012, leading declines in Asian Internet companies amid growing concern that valuations in the industry are overstretched. Tencent retreated 6.1 percent at the midday trading break in Hong Kong, extending an 18 percent drop since March 6, when the stock’s price-to-earnings ratio reached the highest level in almost six years. Naver Corp. lost 3.6 percent in Seoul, while People.cn Co. declined 5.1 percent in Shanghai and Yahoo Japan Corp. dropped 3.3 percent. SoftBank Corp., which owns a stake in Alibaba Group Holding Ltd., sank 3.4 percent. Technology companies have led gains in Asian shares during the past 12 months on speculation growing demand for social- networking, e-commerce and online games will boost earnings and fuel takeovers in the industry. Concern that the rally has gone too far and that companies may be overpaying for acquisitions is building after King Digital Entertainment Plc, the maker of the “Candy Crush” smartphone game, tumbled 16 percent in its New York trading debut yesterday. “The earnings growth of Internet companies and media companies has been quite strong, but obviously everyone knows that their valuations have become expensive,” Khiem Do, the Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management, which oversees about $60 billion, said by phone. “One should expect some profit-taking from the sector. That’s what we’re seeing.”

Valuation Premium

The Bloomberg Asia Pacific Internet Index fell 3.8 percent today to the lowest level since Feb. 5, paring its gain during the past 12 months to 52 percent. That compares with a 0.5 percent drop in the MSCI Asia Pacific Index in the same period. The Internet gauge is valued at 28 times estimated earnings for the current fiscal year, more than twice as expensive as the broader regional index and near the biggest premium since 2006, according to data compiled by Bloomberg. “The Internet names were already pulling back on concern about their high valuations and that process was given more fuel overnight when King dropped below its IPO price,” said You Na, a senior research analyst at ICBC International Research Ltd. in Hong Kong. “The feedback from U.S. investors seems to be that they are concerned and very cautious.” King Digital suffered the steepest decline of a newly listed U.S. company in more than four months yesterday even after it priced shares at a discount to its major peers. “Candy Crush,” a puzzle game featuring different-colored candies, has 97 million daily active users, the company’s IPO prospectus shows. It accounts for 78 percent of King’s sales.

Alibaba IPO

Alibaba, China’s biggest e-commerce company, has kicked off the process for what may be the largest U.S. initial public offering in two years. Investment banks value Alibaba, founded by former English teacher Jack Ma, at as much as $200 billion, which would make it the second-biggest Internet company behind Google Inc. based on market capitalization. There’s no fundamental reason for today’s drop in Asian Internet shares and they’re just following losses in U.S. peers overnight, said David Riedel, the president and founder of New York-based Riedel Research Group Inc. Investor sentiment may improve in coming weeks as the Alibaba IPO refocuses attention on growth prospects in the industry, Riedel said. Tencent, Asia’s largest listed Internet firm, has lost $28 billion of market value since closing at a record high in Hong Kong trading on March 6. The company posted fourth-quarter net income that trailed analysts’ estimates this month on higher costs for its WeChat messaging service. Tencent said yesterday it agreed to pay about $500 million for a 28 percent stake in South Korea’s CJ Games. Shares of Facebook Inc., which agreed to purchase messaging application WhatsApp Inc. for $19 billion last month, fell 6.9 percent in U.S. trading yesterday after announcing another acquisition. The largest social network said it’s buying virtual-reality technology company Oculus VR Inc. for about $2 billion, pushing into wearable hardware for the first time.

For Related News and Information: Facebook Agrees to Buy Device Maker Oculus for $2 Billion NSN N30NM36JIJUQ <GO> King Has Biggest Debut Drop Since November Even With Discount NSN N3293K6TTDS4 <GO> Top emerging-market news: TOP EM <GO> Most-read emerging-market news: MNI EM 1W <GO> Developing economy market moves: EMMV <GO> Emerging-market economic statistics: STAT4 <GO>

--With assistance from Edmond Lococo in Beijing and Lulu Yilun Chen in Hong Kong.

To contact the reporters on this story: Sharon Cho in Seoul at +82-2-3702-1612 or ccho28@bloomberg.net; Kana Nishizawa in Hong Kong at +852-2977-4627 or knishizawa5@bloomberg.net To contact the editors responsible for this story: Michael Patterson at +852-2977-4820 or mpatterson10@bloomberg.net

After Hours Summary: GV +5.7%, PAYX +3.3%, DSS -20.1%, FUL -4.1%, RVNC -1.5% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: - GV +5.7%, - PAYX +3.3%

Companies trading higher in after hours in reaction to news: - EHTH +3.5% (co and InsureMyTrip announced a strategic partnership), - COF (co expects to repurchase $2.5 bln of shares of common stock through the end of Q1 of 2015. Co's plan Receives No Objection from the Federal Reserve. Capital One Expects to Maintain Current Quarterly Dividend of $0.30/Share), - HFC +1.2% (announced plans to enter the mid-continent asphalt market), - WFC +1.1% (received no objection to its 2014 capital plan; to increase quarterly dividend 16.7% to $0.35 from $0.30 per share; Board approves 350 mln share increase in repurchase plan), - BAC +0.8% (announces settlement with FHFA and NY Attorney General; co will increase quarterly dividend 400% to $0.05 from $0.01 per share; authorized a new $4 bln common stock repurchase program)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: - DSS -20.1%, - FUL -4.1%, - RVNC -1.5%

Companies trading lower in after hours in reaction to news: - WBAI -6.1% (filed for $120 mln offering of convertible senior notes; also filed for for $360 mln offering of American Depositary Shares representing Class A ordinary shares), - C -5.5% (Federal Reserve announced it objected to the capital plan submitted by Citi as part of the 2014 Comprehensive Capital Analysis and Review), - ADXS -3.0% (announced porposed public offering of common stock), - O -2.2% (announced commencement of public offering of 10.5 mln shares of common stock)  - KND -1.3% (announced proposed offering of $500 mln of senior notes due 2022)

Copper Sends Bad News

The diagnosis for Dr. Copper remains unhealthy, which suggests further downside. Why its divergence from other commodities is ominous.

Dr. Copper is signaling that more danger is ahead.

Copper, which is consumed for a wide variety of uses including manufacturing and construction, is said to have a Ph.D. in economics because of its ability to forecast economic activity. Hence the Dr. Copper moniker.

When prices of the red metal drop it often presages slower economic activity and lower stock prices. Benchmark contracts for copper have tumbled from around $3.38 a pound at the beginning of the year to about $3.00 recently. But that's only part of the story.

"What really highlights the move with copper is the divergence with other commodities," says Ashraf Laidi, chief global analyst at City Index, in London. He notes that copper prices have sunk while the Thomson Reuters/Jefferies CRB Commodity Index has surged. Eventually the prices of the other commodities will catch up and fall as the economy weakens, he argues. Why?

Laidi has studied similar patterns looking back 20 years to determine the relationship between the CRB and copper price. He saw similar divergences (copper falling ahead of other commodities prices) followed by problems in the economy multiple times. A divergence in 1997 was followed by the Asian financial crisis; one in 1999 preceded the dot-com bust; the one in 2007 came ahead of the housing bust.

Copper prices have actually been falling faster than those of other commodities since around February 2013. This may augur more weakness in China, which consumes a lot of copper for its vast infrastructure projects.

However, some analysts say the use of metal inventories to help with financing deals is part of the reason copper prices are down.

Recently China saw the first default in its corporate bond market, which has led some observers to worry that a "financial sector clampdown will force copper inventories to be liquidated," according to a recent research report from Barclays. "Feedback from our meetings in China [in early March] suggests that the worst may be over (or close to it)."

Still, Laidi is skeptical. "When something happens again and again and again, the reasons may be different, but we have to deal with the consequences," says City Index's Laidi.

The Case Against This Stock Market

Everyone from hedge-fund star Seth Klarman to Website impresario Henry Blodget has soured on

With the stock market sputtering lately, is this finally it—the end of the five-year bull market?

A few notable stock-market minds think investors ought to be concerned.

Cohan summarizes the latest thinking of Seth Klarman, the highly respected hedge-fund manager whose 1991 value-oriented investment book, Margin of Safety, sells on Amazon.com for $1,495 for a used copy.

Writing in his latest investment letter, Klarman, the founder of Boston-based Baupost Group, argues that he sees artificially high prices everywhere he looks in the stock and bond markets.

"A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences," writes Klarman.

Klarman notes that the Nobel-winning economist Robert Shiller has calculated that the stock market's price-to-earnings ratio is more than 25, "a level exceeded only three times before—prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive."

What's more, Klarman writes, "a skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix (ticker: NFLX) and Tesla (TSLA)."

And for what it's worth, Business Insider chief executive and top editor Henry Blodget feels similarly about stocks these days.

Now I don't put Blodget, the former Merrill Lynch tech analyst who was forced out of the securities industry for publicly touting stocks he was privately knocking, in the same league as Klarman.

Instead of investing billions of dollars of client money like Klarman, Blodget spends his days running a Website devoted to the markets and most anything that will generate clicks.

But Blodget deserves his due: He is a thoughtful student of markets. And Tuesday, he penned a provocative piece saying that "stocks are now so expensive that they will likely deliver crappy performance over the next decade. I also believe that there is a decent chance of a 40%-to-50% crash in the next couple of years."

Blodget writes that his view on stocks "is based almost entirely on valuation: According to most historically valid and cyclically adjusted pricing measures, stocks are at least 50% overvalued, and I don't think it will end up being 'different this time.' "

That being said, Blodget is quick to point out that "despite this concern about stock prices, I am not selling my stocks (not yet, anyway). One reason I'm not selling is that valuation is almost useless as a timing indicator: Stocks could go a lot higher before they drop, especially if the Fed keeps frantically pumping money into Wall Street. Another reason I am not selling is that no other major asset classes are attractively priced either, so there's nothing else I want to buy."

Not everyone is seeing bubbles everywhere.

A piece on the Quartz site by investment writer Mark DeCambre makes the case that tech stocks in particular are not in a bubble despite all the action in the space right now, including Facebook's recent purchase of messaging company WhatsApp and King Digital's initial public offering.

"Yesterday the market closed at 4,234.27—around 2% up on the year, but still about 22% shy of that 5,408 peak from 14 years ago," DeCambre writes. "Nor are we anywhere near the pace of tech IPOs seen during those manic days. In fact, between 1999 and 2000, a combined 794 tech execs took their companies public on either the Nasdaq or NYSE stock exchanges. By comparison, the 86 tech firms that went public during 2012 and 2013 looks relatively paltry. So far, only about 10 tech companies have gone public in 2014."

Given the disappointing reception that the King Digital IPO received Wednesday by investors, the tech bubble talk might lose some of its urgency.

Market Update: Declining Australia housing affordability justified more hawkish RBA

***Economic Data*** - (CN) CHINA FEB INDUSTRIAL PROFITS YTD Y/Y: 9.4% V 12.2% PRIOR - (AU) AUSTRALIA Q4 CBA/HIA HOUSE AFFORDABILITY: 74.7 V 75.1 PRIOR (first decline in 3 years) - (NZ) NEW ZEALAND FEB TRADE BALANCE (NZ$): 818M V 600ME (4th straight month of trade surplus) - (KR) SOUTH KOREA MAR CONSUMER CONFIDENCE: 108 V 108 PRIOR - (KR) SOUTH KOREA FEB DEPT STORE SALES Y/Y: -2.4% V +6.8% PRIOR; DISCOUNT STORE SALES Y/Y: -23.1% V +18.6% PRIOR

Market Snapshot (as of 03:30 GMT): - Nikkei225 -1.3%, S&P/ASX %, Kospi %, Shanghai Composite -0.6%, Hang Seng -0.6%, Jun S&P500 flat at 1,843, Jun gold +0.2% at $1,305, May crude oil flat at $100.30/brl

***Highlights/Observations/Insights*** - Asian indices are weighed down by bearish tone from Wall St, where trading was marred by firmer rhetoric from President Obama warning Russia against further aggression and, in extended-session, the release of Fed's CCAR. While 25 out of 30 capital plans were approved, the Fed objected to Citigroup (down over 5% afterhours), HSBC North America, RBS Citizens, Santander Holdings USA and Zions. Nikkei225 is leading regional indices to the downside with a 1.3% slide below 14,300. - In Japan, the uncertainty over the need for early/late/any additional BOJ easing was on display with conflicting comments from the BOJ and the cabinet. Nikkei report citing a source within the central bank indicated that while the BOJ is expecting a soft Q1, subsequent improvement in Apr-June quarter may not require more easing measures. Separately econ min Amari said the BOJ can maximize the impact of easing by surprising the markets. USD/JPY fell some 35pips from its highs below 101.75 in early Asian trade. - The first decline in Australia housing affordability in 3 years, as measured by the quarterly CBA/HIA index, can begin to explain the increasingly less dovish nature of RBA board members, most notably another missed chance by the central gov Stevens overnight. Barclays economist Davies says Stevens is no longer "relaxed" regarding Australia property market gains, and the Sydney house prices - growing at 20% annualized pace - are the canary in the coal mine toward an earlier than expected RBA rate hike. AUD/USD hit a fresh 4-month high above $0.9240 earlier today, with fixed income markets more aggressively pricing in a 2014 tightening. - New Zealand Feb trade number saw its 4th consecutive and a multi-month high surplus. Exports rose 17% y/y to NZ$4.6B, while imports were up just 8% y/y to NZ$3.7B - an 8-month low. Exports to China were again impressive with a 49% y/y rise, and exports of daily rose 38% y/y to NZ$1.6B. - Bank of China did not trade as well as AgBank fared overnight after reporting FY results, rising a modest 0.3%. A note from Moody's may have injected some calm into the China property sector panic, noting property developers will achieve positive but smaller growth in sales revenues over the next 12 months, while maintaining adequate liquidity.

***Fixed Income/Commodities/Currencies*** - (CN) China 7-day repo rate opens up 91bps at 4.80% (highest since Feb 13th) - (CN) PBoc to drain CNY20B in 28-day repos, CNY32B in 14-day repos (11th consecutive drain); drains net CNY98B this week v drained CNY48B prior (7th week of drain) - (CN) PBoC sets yuan mid point at 6.1465 v 6.1440 prior setting (weakest Yuan setting since Mar 21st) - (JP) Japan investors sold net ¥395.5B in foreign bonds last week vs bought net ¥143.1B in prior week; Foreign Investors sold net ¥191.0B in Japan stocks v sold net ¥1.1T in prior week - JGB: (JP) Japan MoF sells ¥2.49T in 0.1% 2-yr notes, Avg Yield: 0.082% v 0.073% prior; bid to cover: 6.58x v 5.15x prior - GLD: SPDR Gold Trust ETF daily holdings fall 4.5 tonnes to 817.0 tonnes (first decline since Mar 17th)

***Equities*** US markets: - GV: Reports Q4 $0.06 v $0.17 y/y, Rev $22.8M v $25.7M y/y; +5.7% afterhours - PAYX: Reports Q3 $0.44 v $0.42e, R$636.5M v $627Me; +3.4% afterhours - ESS: To be added to S&P500, replacing CLF which moves down to the S&P400; effective after the close on April 1st; +1.3% afterhours - WFC: Receives No Objection to Its 2014 CCAR Plan for 16.7% dividend increase to $0.35 (implied yield 2.9%) from $0.30, and 350M share buyback authorization (6.7% of shares outstanding); +1.1% afterhours - BAC: Fed accepts CCAR plan to increase dividend 400% to $0.05 from $0.01; approves $4B buyback program (2.2% of market cap); Settles with FHFA and New York AG; includes cash payment of $6.3B; sees reduction in Q1 net income of $0.21/shr; +0.9% afterhours - JPM: Fed does not object to CCAR capital plan: To increase 5% dividend to $0.40 from $0.38 (implied yield 2.7%) and approved $6.5B share repurchase program (2.9% of market cap); +0.8% afterhours; +0.8% afterhours - AXP: Fed does not object to CCAR plan: To increase quarterly dividend by 13% to $0.26/shr (implied yield 1.16%) and buy back up to $4.4B in common stock (4.6% of market cap); +0.6% afterhours - C: Fed objected to capital plan that sought $6.4B buyback and increase of dividend to $0.05 per 2014 capital review (CCAR); permitted to continue current capital actions through Q1 2015; no timeframe on resubmission; -5.2% afterhours

Notable movers by sector: - Consumer Discretionary: Huayi Brothers Media Corp 300027.CN -3.3% (FY13 results); Qingdao Doublestar 000599.CN +3.4% (Q1 guidance); Jinling Hotel Corp 601007.CN -3.1% (FY13 results) - Financials: Bank of China 3988.HK +0.3% (FY13 results) - Materials: Lynas Corp LYC.AU +20.8% (production update); Zhejiang Haers Vacuum Containers 002615.CN -6.8% (FY13 results) - Energy: Tap Oil TAP.AU +4.3% (awarded exploration project) - Industrials: China Shipping Container 2866.HK -1.7% (FY13 results); Lend Lease Corp LLC.AU -1.6% (legal dispute may delay project development); Toyota Motor Corp 7203.JP +2.3% (share repurchase program); CITIC Pacific 267.HK +14.2% (reverse merger plan from parent company) - Technology: Universal Scientific Industrial Shanghai 601231.CN -3.7% (FY13 results); Shenzhen Laibao Hi-Tech 002106.CN -2.6% (FY13 results); Tencent 700.HK -7.0% (acquires CJ Games) - Healthcare: Sigma Pharmaceuticals SIP.AU +6.0% (FY13 results)