The score will take care of itself ~ Bill Walsh

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The Archegos Debacle Revives My Love for Tencent (ticker: TME)

In this article, we’re going to touch on the amazing story of the Archegos Capital Management’s fund; how a smart guy’s bad timing zero’d out his 10 billion dollar fund and then we’re going to talk about how you can capitalize on this still fresh opportunity. 

 

Pic from FinancialTimes

 

Quick backstory

Archegos Capital Management is a fund run by a man named Bill Hwang. The guy turned 200 million USD into 10 billion dollars in less than a decade. Of course to grow so quickly, the only way to do this is by doing a ton of leveraged trading. Problem is with a frothy market like this, shit gets unpredictable and too many negative events occurred at once. When you trade with your own money, unless the companies go bankrupt, you can just hold on to your stocks until the market turns around (assuming you didn’t make shit investments and only got fucked by blip market events. 

 

However… when you trade LEVERAGED, when shit happens investment firms the LET you leverage in the first place is going to freak out and ask for their money back.  Also, when you trade leveraged, if you’ve invested 10 Billion, you’re actually trading with a LOT more than 10 billion. This is why Goldman and Morgan Stanley alone had to write off more than 20 billion from Hwang’s misfortune. 

Now what does this mean to you and me? This means the stocks that Hwang invested in were forced to sell at a losee so that investment banks can get SOME money back, and since stock prices are built on supply and demand, all of stocks that were effected bottomed out HARD.

 

This also means that those stocks are no longer frothy, which makes it an incredibly interesting buying opportunity. So what stock am I talking about today? 

 

Tencent Music Entertainment Group (ticker: TME)

The easiest way to describe the Tencent Music Entertainment Group is that it’s basically the Chinese version of Spotify. First and foremost, I like the music industry because it’s an industry that’s for the people and serves people relatively ubiquitously, regardless of race, gender, social economics. This is why every once in a while, you see somebody who became famous from youtube start landing music deals because the people want what the people like. Therefore, between music and podcasts, the total addressable market is HUGE.  

 

 

Secondly, the fact that this company is backed by Tencent means that they are established and able to get shit done. Case and point, Tencent and Spotify swapped 10% stake between each other. This means the opportunity to learn from each company, probably share IP, and also making music available in a borderless fashion. I strongly believe it’s good for both Spotify and TME’s business. Furthermore, Tencent has just recently secured licensing deals with Warner, Universal, and Sony music groups. Enough said. 

 

Lastly, if you’re not salivating yet if you look at TME’s stock price after the Archegos debacle, it’s now half the original stock price, with a P/S ratio of 10, when it was closer to 16. Is it still high? Yes, that’s the risk you have to accept in a frothy market if you choose to invest, but I think the long-term positives is much stronger than the risks.


This is because if the economy tanks and people start tightening their belts, industries like search and music will continue to make money regardless; they necessitate AND a significant portion of their business model is freemium services.

 

The 2nd risk you should be aware of is that US policies do seem to affect Chinese stock prices even though most of the time they really shouldn’t. So if you want to play with Chinese stocks, be willing to sit tight because worst-case scenario this will be a long-term stock. If you’re not, I think Spotify is not badly priced right now either and their Podcast game is STRONG!

 

MY hope

In the short term, 3 to 6 months, I hope the stock price adjusts back to pre-Archegos and then I’ll sell probably a large portion of my holdings and then evaluate my next steps.

 

If you have any questions, concerns, or suggestions please hit me up in the comments and I’ll make sure to reach out back to you. Thanks for reading; I look forward to working with you next time

 

Sincerely,

Steve

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