BROKERS’ NOTES: Buy Tencent, sell Thungela

Rowan Williams, director of Nitrogen Fund Managers

Buy: Tencent Holdings

Tencent Holdings presents an attractive investment opportunity based on its recent first-quarter 2026 results and strategic shift towards AI-integrated services. Although revenue of 196.5-billion yuan was below some analyst estimates, this was mainly due to gaming revenues being slightly lower than forecast, which can largely be attributed to the timing of the Spring Festival and its impact on recognition of deferred revenue. The company produced strong quarterly earnings growth; non-IFRS net profit grew by 21%, supported by a 20% increase in advertising revenue driven by the Hunyuan 3.0 AI model. The gaming sector remains stable, with international revenue rising 13% and a new game release, Roco Kingdom: World, delivering one of the strongest mobile debuts in the year with 60-million-plus preregistrations. Although management’s plan to increase research & development and capital expenditure to 36-billion yuan may weigh on short-term margins, the stock’s current valuation — a blended forward earnings multiple of 14 and 11 for the core business (excluding listed and unlisted investments) — is low relative to its historical averages. With a consensus price target of HK$718, the stock offers a projected upside of about 55%, balanced by consistent shareholder returns through its ongoing share buyback programme.

Sell: Thungela

Thungela’s share has rallied 42% year to date following the surge in thermal coal prices, which resulted from the US-Iran conflict and subsequent disruption to global energy supplies, particularly liquefied natural gas (LNG). Thermal coal prices last surged in 2022/2023 due to a combination of demand shocks and supply constraints, as a tight post-Covid market was hit by Russia’s invasion of Ukraine, triggering widespread gas-to-coal switching in Europe. Supply was simultaneously constrained by sanctions on Russian coal, Indonesia’s temporary export ban, adverse weather and logistics bottlenecks. In 2026, the upside for coal depends less on tight markets and more on whether LNG supply disruption is severe enough to force gas-to-coal switching in power generation markets. Compared to 2022, the coal market is far less constrained, with the thermal coal market structurally better balanced because renewables, elevated inventories and supply flexibility buffer demand, which will moderate any price surges in response to increasing demand for coal. We are sellers of Thungela at current levels despite the elevated thermal coal prices and improved Transnet Freight Rail performance. We believe these positives are largely priced in.