20181115-中国银河国际证券-腾讯控股-00700.HK-Regulatory_Headwinds_Remain_for_Mobile_Games__Other_Business_Segments_Continue_to_Boom_28页_1mb

Tencent Holdings Limited [0700.HK] Summary

Core Content Overview

Tencent Holdings Limited is a leading Chinese multinational technology company primarily engaged in value-added services (VAS), online advertising, cloud services, and payment-related business. In Q3 2018, VAS accounted for 54.7% of total revenue, highlighting its dominant role in the company's performance. Despite regulatory challenges in the gaming sector, Tencent's other business segments, including online advertising, payment services, and cloud computing, are experiencing strong growth and maintaining a leading position in the market.

Main Business Segments

• Value-Added Services (VAS): Includes social network and online games, contributing 55% of total revenue in Q3 2018. Mobile games saw a 7% YoY increase in revenue to RMB19.5bn, while PC games declined due to user migration to mobile platforms.
• Online Advertising: Showed robust growth, with 47.1% YoY increase to RMB16.2bn in Q3 2018. Social advertising revenue rose 61% YoY, driven by increased ad inventory from WeChat Moments and Mini Programs.
• Other Business Segments: Payment services and cloud services are the key components, contributing 20.3bn RMB in Q3 2018. Payment services have seen significant expansion, with 80% of WeChat/Weixin users using them and 280% YoY increase in offline commercial payment volume.

Key Financials (2016–2020E)

Investment Highlights

1. Regulatory Headwinds in Gaming:

   • The Chinese government halted new game approvals and imposed restrictions on game content and children's gaming time to address myopia concerns.
   • Tencent's online game revenue declined 3.8% YoY in Q3 2018 but increased 2.4% QoQ to RMB25.8bn.
   • The regulatory environment is expected to continue impacting the gaming sector, but Tencent may benefit from industry consolidation.

2. Growth in Other Business Segments:

   • Online advertising revenue increased 47.1% YoY to RMB16.2bn in Q3 2018, with social advertising rising 61% YoY.
   • Payment services are expanding rapidly, with 80% of WeChat/Weixin users using payment services and a 50% YoY increase in daily transaction volume.
   • Cloud services are also growing, with Tencent Cloud maintaining a strong market position.

3. Ecosystem Building via Investments:

   • Tencent has invested in multiple platforms, including JD.com, Pinduoduo, Meituan, and Weimob, to leverage its massive user base and traffic.
   • These investments provide additional monetization opportunities and help Tencent build a cross-sector ecosystem based on its social media platforms.

Market Position and Trends

• Tencent dominates the Chinese online gaming market with a 51.1% market share in Q1 2018.
• The company's PUBG mobile games have attracted over 12.5m pre-registered users for the PC version and 9.1m Steam-PUBG players linked to Tencent accounts.
• The WeChat/Weixin platform continues to grow, with 1.08bn MAU and 1m active mini programs, contributing significantly to monetization opportunities.
• The online advertising and payment services are expected to grow further, with the online advertising segment projected to increase from 17% to 19% of total revenue by 2019.

Valuation and Outlook

• Tencent is currently valued at 27.1x 2019 PER, below its historical average.
• Based on a 5-year DCF model, the target price is HK$341.9, representing a 25.6% increase from the closing price of HK$272.2 on November 14, 2018.
• The company is expected to maintain volatility in the share price due to ongoing regulatory uncertainty.
• The regulatory restrictions are likely to continue impacting the gaming sector, but the long-term benefits of consolidation and platform monetization are expected to strengthen Tencent's fundamentals.

Conclusion

Tencent is navigating a challenging regulatory environment in the gaming sector, but its diversified business model and strong presence in online advertising, payment services, and cloud computing provide a solid foundation for long-term growth. The company's ecosystem-building strategy through strategic investments further supports its expansion and profitability. Despite near-term volatility, the outlook for Tencent remains positive, with potential for sustained earnings growth and value creation.