20131108-大和证券-Creating_a_new_eco-system_for_mobile_Internet_19页_1mb

Tencent Holdings 700 HK Summary

Core Content

Tencent is positioned as a leading global mobile social platform, with its WeChat app playing a central role in its strategy. The report highlights Tencent's efforts to monetize WeChat through mobile games and new services, aiming to create a new ecosystem that connects online and offline activities.

Main Points

• WeChat's Monetization: Tencent is rapidly monetizing its WeChat app through mobile games and new services, which are expected to significantly boost revenue. The report forecasts WeChat's revenue to reach CNY4.9bn in 2014, up from CNY1.4bn previously.
• Growth Outlook: The company is projected to achieve a CAGR of 35% in revenue from 2013 to 2015, driven by the online-games business, new game launches, and mobile game development.
• New Business Model: Tencent is creating a new ecosystem by expanding its online-to-offline (O2O) services via WeChat, which could become a significant revenue growth driver.
• Mobile Games: Mobile games are expected to be the primary revenue source for WeChat in 2014, contributing 82% of total revenue, followed by 3% from public account subscriptions and 15% from other sources such as e-commerce and content publishing.
• Investment in Sogou: Tencent has invested USD448m to acquire a 36.5% stake in Sogou, giving it 20.6% of voting rights, which could help in leveraging mobile search capabilities.

Key Information

• Target Price: Raised to HKD500 from HKD380, with an upside of 21.4%.
• Stock Performance: The stock has been a top performer, up 66% year-to-date, and is expected to continue outperforming in 2014 due to its scarcity value as the only large-cap Chinese Internet stock listed in Hong Kong.
• Financial Forecast:
  • Revenue: Expected to rise from CNY60,795m (2013E) to CNY84,611m (2014E) and CNY110,355m (2015E).
  • Net Profit: Forecast to increase from CNY17,327m (2014E) to CNY22,378m (2014E) and CNY28,913m (2015E).
  • EPS (adjusted fully-diluted): Projected to reach CNY11.765 (2014E) and CNY15.188 (2015E).
• Valuation: Based on a target 2014E PER of 35x, which is 2SD above the stock's past-8-year average and in line with its Chinese Internet peers.
• User Growth: WeChat is expected to reach over 600m users by the end of 2014, with at least one-third (around 200m) being overseas users.
• Mobile Internet Trends: With 80% of Chinese users accessing the Internet via mobile devices in 1H13 and a forecasted 32% smartphone penetration rate in 2013, and 46% in 2014, Tencent is well-positioned to benefit from this trend.
• O2O Services: These services are seen as a promising area for growth, offering a new ecosystem connecting users and offline retailers. However, the report acknowledges potential implementation challenges with offline vendors.
• Competitive Landscape: WeChat is expected to maintain its dominant position in the Chinese market, even with competition from apps like Yixin and Laiwang.

Recommendations

• Investment Rating: Buy (unchanged), with the report reiterating that Tencent is likely to outperform in 2014 due to its strong earnings growth outlook and new mobile ecosystem strategy.
• Risks: The report notes potential downside risks, including a sharp decline in revenue from core games and slower-than-expected monetization of WeChat.

Financial Summary

• Revenue Growth: Expected to increase from CNY60,795m (2013E) to CNY84,611m (2014E) and CNY110,355m (2015E).
• Net Profit: Projected to grow from CNY17,327m (2014E) to CNY22,378m (2014E) and CNY28,913m (2015E).
• EPS Growth: The adjusted fully-diluted EPS is forecasted to reach CNY11.765 (2014E) and CNY15.188 (2015E).
• Dividend Yield: Expected to increase from 0.4% (2013E) to 0.7% (2015E).
• PBR and EV/EBITDA: These metrics are projected to decline, reflecting increased market valuation.

Key Assumptions

• Active Users: Expected to grow from 848.5m (2013E) to 888.5m (2014E) and 908.5m (2015E).
• Fee-based Subscriptions: Forecasted to rise from 100.7m (2013E) to 104.7m (2014E) and 97.3m (2015E).
• Mobile Game Revenue: Expected to increase from CNY1.4bn to CNY3.9bn (2014E).

Conclusion

Tencent's strategic focus on monetizing WeChat through mobile games and O2O services positions it as a leader in the mobile Internet space. The company's strong user base, combined with its ability to integrate new services and leverage its existing online presence, supports its growth outlook and valuation. The report remains positive on Tencent's future performance and potential for new business models.