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Comment by shaqbert | Hacker News Reader

Tencent benefits from insane price-earnings multiple inflation in China.

By buying a profit-rich gaming company, they can play the multiple game, and lower their P/E multiple in China, thus looking "cheap".

In general, gaming companies have been trading at fairly low multiples (King was trading for a while at multiples known for steel mills shortly before their bankruptcy), based on the assumption that the business is hit driven and the life cycle of a hit game is rather short. Yet Supercell has been defying the odds for quite some times now...

So who knows... playing the multiple game might turn out a much better deal long term.

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Hey shaqbert, how do you keep tabs on these sorts of things? I want to get to know more about the financial markets but I mean, I don't know where to start--there's just so many companies out there.

Start by reading "A Random Walk Down Wall Street" by Malkiel, it covers the ins and outs (and gives you a starting point for more research on anything you don't understand).

After that it's on you to read financial news. Knowing that the Chinese market is hyper-inflated, coupled with the knowledge from the Malkiel book about P/E tricks, it's easy to make the connection.

edit: I was reflecting on the last line and I want to point out that nothing is "easy" in finance, it takes a lot of hard work to reach a level of competent understanding. More that once you have the toolkit to understand the basic financial shenanigans that have been going on for a century (or more), a lot of seemingly strange behaviors become rational.

>King was trading for a while at multiples known for steel mills shortly before their bankruptcy

King was acquired by Activision for 6B. Do you mean before King went bankrupt in 2003? Is that relevant?

No, King was trading at super low multiples. Like steel mills that are about to go bust. My point is that King is a MUCH better business that a steal mill about to go bust, so financial markets were dead wrong.

Not sure what you mean by insane PE inflation, their stock market bubble is long since popped. The Shanghai Composite hasn't net moved in five years, the same is true for Hong Kong. Tencent has been sporting a 35-40 PE ratio lately.

Facebook's PE is ~70 by comparison. In the last few decades, a PE of 35-40 for a tech company isn't particularly rich for a successful company with years of growth ahead of it yet. Google for example has commonly had a PE above or near that level for over ten years.

When did King go bankrupt? They came close when private but kdon't now what you mean here

No, he is saying King was trading at valuations close to steel mills prior to those same steel mills going into bankruptcy.

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