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On January 6th, local time, the U.SDepartment of Defense added 134 Chinese tech companies, including Tencent and CATL, to the 1260H list, which designates them as "Chinese military companies."

As a result, that evening, Tencent's American Depository Receipts (ADRs) plummeted by more than 7% in trading on the U.Sstock market.

On January 7th, Tencent's stock in Hong Kong fell by 7.28%, with an unusual surge in trading volume, closing at HKD 379.6 per share, resulting in a market value decrease of approximately HKD 270 billion from the previous day.

CATL saw a drop of over 5% in early trading, closing at CNY 249.45 per share, down 2.84% for the day.

The 1260H list derives from a provision requiring the U.S

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Department of Defense to annually update and disclose a blacklist of Chinese companies operating directly or indirectly in the U.S., also referred to as the Chinese Military Companies List.

What is the intention behind the U.SDepartment of Defense labeling these Chinese tech giants as military companies?

The timing is particularly intriguing, as it comes just before the inauguration of the new U.SPresident on January 20th.

This move by the U.SDepartment of Defense appears to be laced with political maneuvering, providing the incoming administration with a bargaining chip in negotiations related to technology and renewable energy.

On January 7th, Tencent stated, “Being listed is clearly a mistake; we are neither a military enterprise nor a military supplier

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Unlike export controls, this list does not affect our businessNevertheless, we will work with the relevant U.Sdepartments to resolve this misunderstanding.”

CATL also responded, labeling it an error, asserting that the company is not engaged in any military-related activities.

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Public records indicate that the U.SDepartment of Defense’s 1260H list has been revised multiple times, with several companies previously listed being removed within months after successful appeals or lawsuits.

Enterprises once listed can communicate and possibly remove themselves from the list.

Against the backdrop of escalating technological competition between China and the U.S., regardless of whether these companies ultimately remain on the list or are taken off, the U.S.'s extended jurisdiction will undoubtedly stir significant ripples among two major Chinese tech firms.

Specifically, the repercussions can be distilled into two main points:

Firstly, business operations are affected.

After DJI was placed on the list in 2022, the U.S

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Department of Defense ceased purchasing DJI drones.

In the context of Sino-American rivalry, any tech company that finds itself on the 1260H list will inevitably experience impacts in procurement, contracts, financing, and supply chain dealings.

Regarding global electric vehicle battery installations, CATL maintained the leading position in 2024, securing a market share of 36.8% by the third quarter.

However, due to the EU's tariffs on Chinese electric vehicles, the pace of market share expansion for Chinese battery manufacturers in Europe is gradually slowing.

CATL's largest client is Tesla, a U.S

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electric vehicle company, which held a 15.5% share in Tesla China's sales as of August this year.

Additionally, CATL has a technology licensing cooperation with Ford in the U.Smarket.

The Department of Defense’s document could serve as a warning to American companies, highlighting potential risks in engaging in business transactions with CATL.

Tencent's global expansion dates back to 2008, driven by market saturation and shifts in policy within China, prompting Tencent to enhance its overseas prospects.

Through strategic acquisitions and investments, Tencent has significantly increased its international impact across Southeast Asia, Europe, and North America.

Note: The funding amount represents the company’s total for this round and does not equal Tencent’s actual investment amount.

Beyond its popular WeChat app, mini-programs, and Tencent Cloud, the company has seen substantial success in content expansion, particularly in online gaming, online literature, and web series.

In gaming, Tencent surpassed Sony in 2019, becoming the world's highest-grossing game company with revenues reaching CNY 115 billion.

Goldman Sachs forecasts that by 2035, Tencent's gaming revenue will hit CNY 390 billion, with a domestic/international ratio of approximately 60%/40%.

Despite the strong market response to being listed, Tencent's official statement maintains that their revenue from the U.S

constitutes less than 2% of total revenue, thus the list's impact is minimal.

Overall, the sanctions by the U.Sagainst Tencent may not manifest drastically in direct business aspects; however, there could be some impact on overseas gaming operations, primarily affecting corporate image and market investment confidence.

Secondly, the corporate image suffers direct damage.

Once labeled as a sanctioned enterprise, negative perceptions can spread widely throughout the market, affecting trust from partners and hindering the company's financing capabilities.

Given societal opinion and wavering investor confidence, the company's developmental prospects may face additional challenges.

For instance, prominent investor Duan Yongping, who had previously shown strong support for Tencent, alongside other major stakeholders, may choose to divest their Tencent shares due to the company being placed on the list, which could represent a more significant downside.

Documents from the Hong Kong Stock Exchange indicate that on January 6th, Tencent's major shareholder Prosus sold 367,000 shares of Tencent Holdings' H-shares, reducing its ownership from 24.01% to 23.99%.

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In 2024, both Tencent and CATL have invested significant efforts in boosting their market value, with Tencent engaging in substantial buybacks while CATL focuses on hefty dividend payouts.

Following the recent blow from the U.S., Tencent may intensify its buyback initiatives.

Recent reports indicate that Tencent repurchased 3.93 million shares for HKD 1.5 billion on January 7th.

By 2024, Tencent’s total buyback amount reached HKD 112 billion, thereby driving down the total share capital to 9.22 billion shares, marking a decade-low.

Following the buyback completion, Tencent's stock price surged, with an annual increase of 43.7% in 2024. By December 31, 2024, Tencent's stock price reached HKD 417 per share, resulting in a total market value of approximately HKD 3.85 trillion.

As a leader in global power batteries, CATL declared a special dividend of CNY 5.4 billion in 2024, further consolidating its market position, with CATL's stock rising by 68% within the year, significantly outperforming the broader market and other indices.

By the end of 2024, CATL's stock price closed at CNY 266 per share, with a market capitalization of CNY 1.1713 trillion, being the only company on the ChiNext board to reach a market value of over one trillion.

In summary, both Tencent and CATL are outstanding Chinese companies, maintaining a promising outlook for the future.

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