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English to Chinese: TENCENT_2Q11_REVIEW(by Morgan Stanley) General field: Bus/Financial Detailed field: Finance (general)
Source text - English 2Q11:Open Platform-A Likely New Catalyst
Tencent's total Revenues grew 6% QoQ and 44% YOY, to Rmb6.7bn, in line with our estimates.
Internet Value-added Services(IVAS) sales advanced 3% QoQ and 50% YoY, to Rmb5.4bn: Online game revenue expanded 2% QoQ and 70% YoY, to Rmb3.6bn. IVAS contributed 80% of total revenues vs. 83% in 1Q11 and 77% in 2Q11. IVAS paying subscriptions grew 6% QoQ(vs. 10% in 1Q11), to 76.5mn. ARPU contracted 5% QoQ but expanded 24% YoY, to Rmb 24.1 per month(vs. Rmb25.4 in 1Q11), we calculate.
Mobile Value-added Services(MVAS) sales expanded 2% QoQ and 18% YoY, to Rmb794mn:MVAS accounted for 12% of total sales vs. 12% in 1Q11 and 14% in 2Q11. The YoY growth mainly reflected increased revenues from bundled SMS packages and growth in mobile games. MVAS paying subscription rose 10% QoQ(vs. 11% in 1Q11), to 29.8mn.
Online advertising sales grew 82% QoQ and 29% YoY, to Rmb 512mn: This area accounted for 8% of total sales( vs. 4% in 1Q11 and 9% in 2Q10).
Tencent's operating profit declined 18% QoQ but expanded 17% YoY, to Rmb2.8mn: General and administrative expenses jumped 52% QoQ, to Rmb1.4bn, mainly due to expenses related to the acquisition of Riot Games, a US-based independent online game developer and publisher. Such expenses included amortization of intangible assets acquired (Rmb 191mn) and one-time transaction costs(Rmb54). Operating margin was 41%(vs. 53% in 1Q11 and 51% in 2Q10). Excluding share-based compensation, gain on disposal and amortization of intangible assets, non-GAAP operating profit was Rmb3.2bn(up 3% QoQ and 28% YoY). Non-GAAp operating margin was 48%(vs. 49% in 1Q11 and 53% in 2Q10).
Net profit attributable to equity holders shrank 18% QoQ but rose 23% YoY, to Rmb 2.3bn: Net Margin was 35%(vs. 45% in 1Q11 and 41% in 2Q10). Non-GAAP net profit attributable to equity holders was Rmb2.7bn(up 4% QoQ and 32% YoY). Fully diluted EPS were Rmb1.26, compared with Rmb1.54 in 1Q11 and Rmb 1.03 in 2Q10.
We have reduced our forecasts for 2011 and 2012: this reflects lower growth from IVAS and MVAS sales. We project Tencent's total revenues to be Rmb28.0bn in 2011(down 2% vs our previous estimates) and Rmb36.3bn in 2012(down 2%). We project diluted EPS of Rmb 5.60 for 2011(down 7%) and Rmb 7.09 for 2012(down 4%), mainly due to the amortization costs related to the Riot Games acquisition.
English to Chinese: part of the Business of Value Investing General field: Bus/Financial Detailed field: Business/Commerce (general)
Source text - English Chapter Four
Establish a Sound Investment Philosophy
THE FIRST ELEMENT
Value investing is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.
The vast majority of information about any particular investment is merely noise. Successful businesses usually are identified by a handful of meaningful variables or data points; everything else is secondary to the success or failure of the business. Warren Buffett has often remarked that he never uses a spreadsheet or calculator when making investment decisions. It is also true that Buffett has a gifted mind for numbers and remembering data. The point is not against the use of spreadsheets (or a calculator). Spreadsheets and calculators are tools that can add value to any analysis. The point is that elaborate spreadsheets with hundreds of formulas and ratios have so many built-in assumptions that most likely offer no
additional value to the investment analysis. After the first several major pieces of data, any additional variables offer very litde signifi¬cant value to the analysis.
Consider Buffett's 1973 investment in the Washington Post Company. An often cited example by value investors, the invest¬ment illustrates the elegance of a straightforward, businesslike approach to investing. In a 1984 speech at Columbia University, Buffett discussed his attraction to the company: "The Washington Post Company in 1973 was selling for $80 million ... at the time, you could have sold the assets to any one of ten buyers for not less than $400 million."1 ,
While Buffett had been keenly familiar with the operations of the Post Company through his friendship with Post publisher Katherine Graham, he made his ultimate investment decision based on facts, not hundreds of bits of information about newspaper subscriptions, advertising revenue, and so on. He determined that you could buy approximately $1 worth of assets for 20 cents and that, over time, tiiat was a very good bet to make. Any time you can buy $1 worth of assets for substantially less, it's generally a good bet to make.
I discussed in Chapter 1 why approaching any particu¬lar investment as if purchasing an actual piece of a business as opposed t6~aTshare of stock;leads to a more intelligent invest¬ment process. Attempting to invest in stocks or any other security without first defining and understanding the reasoning behind your investment considerations is like jumping into the ocean without first having learned to swim in a pool. Likely you will suc¬cumb to emotion and fear at the slightest sign of troubles, and your chances of long-term survival are slim. Most, if not all, of your market, activities would be speculative but mistaken for an investment operation because no fundamental intellectual frame¬work exists behind the decision-making process. This chapter lays out the foundation of value investing, which is to have a sound investment philosophy. Successful value investing does not rely on advanced intellectual capability but hinges on understanding the value investing approach. The philosophies of the value investing approach either will take hold with an investor or they will not. It's that simple. This doesn't mean that you must be born with a value investing orientation; it does mean that once you under¬stand the philosophies of value investing, it immediately clicks in your brain or it doesn't.
And the philosophies underlying value investing are straight¬forward. Value investors focus on capital preservation first and capital appreciation second. The main focus of value investing is avoiding permanent losses of capital. Value investors understand that buying a stock at $20 per share and holding it until it declines to $10 is not a permanent loss of capital but a mere move in the stock price. Value investors distinguish between risk—the proba¬bility of a permanent capital loss—and volatility—the mere move¬ment in stock price. They also understand that the price paid for an investment ultimately determines the future investment results. But value investors don't worry over whether to pay $15 or $15.50 for a share of stock; instead they focus on whether $1 of assets can be bought for substantially less. Also, value investors seek to elimi¬nate as much risk as possible from investing by seeking out only those investments selling at valuations that create a very comfort¬able margin of safety.
The value investing approach is an all-or-none proposition. You don't choose to be risk averse yet pursue the popular invest¬ments of the day without any regard to margin of safety. Without the foundation of a sound investment philosophy, an attempt at investing based on the risk-averse tenants of value investing is lost.
Preservation of Capital Is the Name of the Game
Value investing, by its nature, is a highly contrarian approach. The aim of every investor is to sell an asset at a higher price than that at which it was bought. However, value investors have one aim that comes before realizing a capital gain. First and foremost, value investing focuses on avoiding losses. Although loss aversion may indeed be the goal of every market participant, it seems absent in the decisions of many market bets. By investing at undervalued prices, value investors avoid losses. Often undervalued securities are found in areas unloved by the overall market, thus requiring value investors to zig when most zag. Before making any invest¬ment, value investors consider and analyze not how much money can be made but how much money can be lost. Mohnish Pabrai sums it up succinctly when he remarks: "Heads I win big, tails I don't lose much."2
Buffett has immortalized value investors' aversion to capital losses with his two top rules of investing:
The focus on capital preservation is of paramount importance to the value investor. Value investors are not interested in situations where the odds of a capital loss or gain are 50/50 or even 40/60. The goal is to find opportunities where the probability of loss is minimal and there is a probability of a very high upside. Attention to capital preservation requires that you pay attention to the value of the business and ignore stock price fluctuations, unless they pro¬vide an opportunity to buy at cheap prices or sell at fully valued prices.
Focusing on the underlying business and not the stock price allows you to understand the fine line between preservation of capital and capital at risk of permanent loss. If you buy shares in a business for $50 that you determine to have an intrinsic value of $100, you shouldn't panic if you see the stock price decline to $30.
Assuming you have analyzed the business and determined its oper¬ations sound and its management able, the 40 percent decline in the price of the shares is meaningless in the long run relative to the value of the business. The movement in the stock price has not per¬manently eroded your capital. If you succumb to emotion because you can't stomach watching the stock price decline and sell the stock, you have made a temporary decline in the stock's price lead to a permanent loss of capital.
I can't overemphasize the tremendous importance of separating the activity of the stock price from the activity of the business. Stock prices tend to overreact in both directions. If a company reports quarterly results that are a few pennies less than the estimates ana¬lysts had in place, the price of the stock can go down by double dig¬its in no time at all.
Consider this statement made by William Ruane and Richard Cuniff of the Sequoia Fund in 1987. I preface by adding a little color to the market environment of the time: Until August 1987, the stock market had surged. This surge was followed by a stock market crash in October 1987, when the Dow Jones declined by nearly 23 percent in a single day. Cuniff and Ruane astutely commented:
Disregarding for the moment whether the prevailing level of stock prices on January 1, 1987 was logical, we are certain that the value of American industry in the aggregate had not increased by 44% as of August 25. Similarly, it is highly unlikely that the value of American industry declined by 23% on a sin¬gle day, October 19.3
Investors should ponder this thought when stock prices fluctu¬ate widely. At the time of this writing, the U.S. Treasury has spent over $150 billion to aid American International Group (AIG) and over $1 trillion on rescuing the financial sector. As a guest writer for investing sites, I recently got an e-mail from an investor who was concerned about the precipitous decline in one of his investments. This e-mail stood out because of the timing. The man writes about a particular security and remarks, "The stock ... is being hammered ... I am very fearful and thinking about selling it tomorrow." This note came on the evening after a near 500-point drop in the Dow.
Such fears run rampant during periods of market turmoil. It is very easy to surrender to your emotions and exit in a state of panic. The human brain is not designed to tolerate or ignore pain, and financial loss is arguably one of the most painful experiences a human can face. Emotional pain can surpass physical pain in terms of severity and longevity. This behavior often is responsible for most capital losses many investors, both individual and professional, real¬ize. Selling at a loss is not the problem; as investors, we will all make mistakes and must realize that, at times, the most prudent course of action is to cut our losses and move on. The key point is to differ¬entiate between deterioration in the economics of the business and a drop in share price. Several days of stock price declines usually have nothing to do with the quality of the business but more with the general mood of the market. Usually more than a week is nec¬essary to determine if the underlying business has lost some of its economic advantages or earning power.
Price Paid Determines Value Received
Before investing, it is vital to understand the function the markets play. Stock markets are important only because they allow you to buy and sell ownership interests in businesses. Everything else is just noise. I like to say that the best investors are pretend investors: those who can pretend that the stock market does not exist.
One of the best advantages of a stock market, liquidity, also hap¬pens to be one of the worst. Being able to buy and sell stock at the click of a mouse causes most investors more harm than good. Of course, if you find yourself in a financial bind and need access to capital, the liquidity of the stock market helps you, but I assume that you are investing capital that will not be needed for meaning¬ful periods of time. In this case, the liquidity of the stock market is not as beneficial as you might think. Paying constant attention to the daily fluctuation in stock prices can influence you to make very poor investment decisions.
As an investor, your goal is to let the market give you the opportunity to buy and sell at attractive prices, not instruct you on when to buy and sell. It is not uncommon for two investors investing in the same security to have materially different invest¬ment results, even to the extreme where one result is gain and the other is a loss. The reason is due to the price paid for the invest¬ment. Value investors approach the market as a proxy for deter¬mining whether security prices are undervalued, fairly valued, or overvalued. They don't allow the market to formulate their invest¬ment decisions. This distinction between guidance and instruc¬tion is very subtle and often is blurred, especially when the market is experiencing periods of wide price fluctuations, or volatility. Referring back to the e-mail I received, it's obvious that this indi¬vidual was being influenced by the rapid decline in the stock price although the business was doing just fine. He let the market vola¬tility instruct him and make him feel that he had made a mistake. Make no mistake, it's not easy to watch your investment decline by 20 percent in a week or two and not feel like you have made a dumb move.
Between September 15 and 19, 2008, the Dow Jones experi¬enced one of the most volatile trading weeks in history. The mess created by the excessive and irresponsible mortgage and securitiza¬tion practices came very close to creating a financial catastrophe. Whether you agree with the government bailout or not, without it, the market contagion that would have resulted would have made the 1987 stock market look like a dress rehearsal. On September 15, the Dow dropped over 500 points, or 4.4 percent, on news that insur¬ance titan AIG was facing collapse. On Wednesday, the Dow declined another 450 points, or 4.1 percent. The final two days of the week, the Dow gained nearly 800 points, or 8 percent, to leave the stock market average basically unchanged over the week. Had you let the price vol¬atility instruct your decisions, you were selling during the drops out of fear and buying again at the end of the week when the mood became more optimistic. Without even realizing it, you were selling low and buying high.
In fact, most equity portfolios were worth more at the end of the week as the two-day surge in the market recaptured the declines earlier in the week and then some.
Investors would benefit tremendously if they would remember to echo the sentiments of Bill Ruane and Richard Cuniff during moments of great market turmoil. Before succumbing to your emo¬tions and rushing to sell at moments of pessimism (or buying at moments of jubilant optimism), step back and ask yourself whether the movement in the stock price reflects the intrinsic or true value of the business. Absent some discovery of fraud or any other illegal activity, a quick decline in stock price should not persuade you to head for the exit. Instead, you need to look at the business. If your fundamental thesis remains intact, then do nothing or buy more of a good thing for less.
The Starting Point Matters
Value investors often are credited with espousing the buy-and-hold approach to investing. Warren Buffett is famous for say¬ing "My holding period is forever." A buy-and-hold technique enables the greatest attribute of investing to play out: compound¬ing. If you are constantly buying and selling stocks, the frictional costs—commissions, taxes, fees—will eat into your profits. Nothing is more valuable or sought after than a wonderful business that can deliver returns year in and year out. These investments allow you to sit back and enjoy the ride.
However, the concept of buy and hold is not without its cave¬ats. The most crucial one is the starting point of the buy process. Whenever you hear any serious investor advocate the concept of buy and hold, take the phrase a step further to mean buy at the right price and then hold. In value investing, the stock price is of extreme importance when entering and exiting an investment. When prices indicate that a good business is cheap, use it to your advantage to make a good investment. Conversely, when prices indicate that business values have exceeded intrinsic value, use the opportu¬nity to sell the overvalued business and once again buy an under¬valued business. At any other time, the stock price fluctuation is a distraction.
To appreciate the significance of why valuation matters in choosing the right starting point, consider the 17-year period from 1964 to 1981. Had you bought the stocks in the Dow Jones Industrial Average at the beginning of 1965 and held until 1981, your returns would have been nonexistent. During those 17 years, the Dow Jones started and ended at the same point. At the begin¬ning of 1965, the Dow stood at about 875 points. Seventeen years later, the Dow was at 875. A buy-and-hold approach over that period would have effectively delivered a zero percent return—a negative return when you factor in decline in purchasing power over that period.
Seventeen years is a significant amount of time. For many inves¬tors, it represents the bulk of their investment years and is certainly a long enough buy-and-hold period. Interestingly, the period from 1982 to 1999 turned into one of the greatest market periods in American history. The Dow Jones advanced more than tenfold, and a $100,000 investment in 1982 would have made you more than $1 million by the end of 1999.
The starting point matters. While you can never expect to buy at the exact bottom (say, in 1982) and sell at the peak (as in 1999), you can avoid doing the exact opposite, which is what many inves¬tors did by buying in the late 1990s at inflated prices. Excited by the quick and unsustainable rise in stock prices fueled by the Internet boom, investing turned into speculating motivated by greed rather than commonsense business principles. Very few individuals would pay $10 million to buy an entire business that had no customers, much less profits. Yet millions of well-educated people were buying shares of companies valued at billions of dollars without a single dollar of profits.
A very good rule of thumb and decades of data suggest that the best starting points occur when the price to earnings (P/E) ratios are lower rather than higher. The P/E ratio is simply the share price of stock divided by the per-share earnings of a business. It repre¬sents how much investors are willing to pay for the future earnings of a business based on future business expectations. If a compa¬ny's shares trade at $20 and its earnings per share for the year are $2, then the P/E ratio is 10 (20/2). The inverse of the P/E ratio is known as the earnings yield or the percentage of earnings per share. In the example, the earnings yield is 10 percent (2/10). As you can see, the lower the P/E ratio, the higher the earnings yield.
Interestingly, you don't need decades of data to tell you that it is more prudent (and more likely profitable) to look for quality busi¬nesses that are trading at lower P/Es. Anyone would rather pay $1 million for a business that earns $200,000 in profits versus one that earns $100,000, all else being equal. Similarly, the odds of favorable market returns increase when the general market has a lower P/E ratio. In fact, decades of data confirm this logical assumption, as shown in Table 4.1 and Figure 4.1.