20141113-巴黎银行证券-The_game_isn_t_over_12页_527kb

TENCENT 700 HK Summary

Core Content

• Target Price: HKD153.00
• Current Price: HKD129.20
• Upside: +18.4%
• Prior Target Price: HKD158.00
• Change in TP: -3.2%
• Market Recommendation: Positive (41%), Neutral (10%), Negative (1%)

Main Disappointment

• 3Q14 Results Missed Expectations: Revenue was 3% below estimate, operating profit 7% below, and net profit 10% below.
• Mobile Game Revenue Decline: Mobile game revenues dropped sequentially to RMB2.6b (-13% q-q), marking a reversal from three quarters of growth.
• Reason for Decline: Delays in game upgrades to comply with iOS requirements, which were completed by October.

Positive Aspects

• Advertising Growth: Strong performance in advertising, with a 76% year-on-year increase, driven by video content (e.g., Voice of China 3, FIFA World Cup) and mobile ads (Qzone performance-based ads and WeChat official accounts).

Monetisation Potential

• Mobile Apps: Tencent's mobile security app reached 585 million activated installations (+92% y-y), and its app store market share increased to 24% from 8% in 20 months.
• Future Upside: These assets are considered under-monetised, offering potential for growth in the coming quarters.

Investment Thesis

• Competitive Advantage: Tencent's dominant traffic platforms (QQ IM on PC, WeChat on mobile) allow it to flexibly monetise its user base.
• Monetisation Capabilities: Strong revenue growth despite shifts in revenue mix from mobile VAS to community VAS and online games.
• WeChat as a Platform: WeChat is evolving into a complete mobile platform, capturing significant monetisation potential with 468 million monthly active users (MAU).

Catalysts

• WeChat Growth: Continued increase in WeChat user numbers and new monetisation opportunities are expected to be positive catalysts.
• New Mobile Games: Introduction of new mobile games is anticipated to boost confidence in Tencent's mobile platform strategy.

Risks

• Market Growth Slowdown: Potential slowdown in online game market growth.
• Monetisation Delays: Slower-than-expected monetisation of the mobile platform.
• Regulatory Impact: Changes in regulations or mobile OS ecosystems (iOS and Android) could affect WeChat's status as a free mobile communication service.
• Weak Execution: Poor performance in new businesses and investments could undermine the investment case.

Company Background

• Founded in 1998 in Shenzhen: Primarily engaged in Internet, mobile, and telecommunication value-added services in China.
• Public Listing: Listed on the Hong Kong Stock Exchange in 2004.
• Segments: Value-added Services (Online Games and Social Networks), Online Advertising, E-commerce Transactions, and Others.

Financial Highlights

• Revenue: RMB19.81b (3% below BNPP estimate)
• Operating Profit: RMB7.52b (7% below BNPP estimate)
• Net Profit: RMB5.66b (10% below BNPP estimate)
• Gross Margin: 63.8% (up from 61.6% in 2Q14)
• OP Margin: 37.9% (down from 39.7% in 2Q14)

Segment Performance

• Online Games: RMB11.32b vs. BNPP estimate of RMB11.84b.
• Social Networks: RMB4.72b vs. BNPP estimate of RMB4.88b.
• Online Advertising: RMB2.44b vs. BNPP estimate of RMB2.21b.
• E-commerce Transactions: RMB0.46b vs. BNPP estimate of RMB0.90b due to traffic shift to JD.com.

Operating Metrics

• WeChat MAU: 468 million (+7% q-q, +39% y-y)
• QQ and Qzone MAU: Slight decline (-1.1% and -2.5% q-q) but continued mobile growth (+4.1% and +1.9% q-q).
• Fee-based VAS Subscriptions: Increased sequentially for the first time in six quarters, indicating a potential bottoming out of the PC slowdown.

Key Financials

• Recurring EPS (RMB): 1.69 (2013A), 2.52 (2014E), 3.20 (2015E), 3.89 (2016E)
• EPS Growth (%): 21.5 (2013A to 2014E), 48.6 (2014E to 2015E), 27.1 (2015E to 2016E)
• Recurring P/E (x): 60.3 (2013A), 40.6 (2014E), 31.9 (2015E), 26.2 (2016E)
• Dividend Yield (%): 0.2 (2013A), 0.4 (2014E), 0.5 (2015E), 0.6 (2016E)
• EV/EBITDA (x): 39.5 (2013A), 25.3 (2014E), 20.3 (2015E), 16.5 (2016E)
• Price/Book (x): 16.1 (2013A), 11.5 (2014E), 8.5 (2015E), 6.4 (2016E)
• Net Debt/Equity (%): -69.0 (2013A), -82.0 (2014E), -90.3 (2015E), -95.4 (2016E)
• ROE (%): 31.2 (2013A), 33.2 (2014E), 30.6 (2015E), 27.9 (2016E)

Earnings Sensitivity

• Total Revenue Increase: 10% would raise 2014E/2015E EPS by 25.5% / 24.6%.
• EBIT Margin Increase: 5ppt would raise 2014E/2015E EPS by 25.5% / 24.6%.
• Total Revenue Decrease: 10% would reduce 2014E/2015E EPS by 22.8% / 22.0%.
• EBIT Margin Decrease: 5ppt would reduce 2014E/2015E EPS by 22.8% / 22.0%.

Revenue Mix

• Online Games: Dominant revenue segment with consistent growth.
• Social Networks: Significant growth driven by mobile item sales and subscription revenues.
• Online Advertising: Strong performance due to video and mobile advertising.
• E-commerce: Decline due to traffic shift to JD.com, but improved gross margin.

Key Assumptions

• Online Game Revenues (RMB m): 31,965 (2013), 44,351 (2014E), 54,122 (2015E), 63,823 (2016E)
• Social Network Revenues (RMB m): 13,020 (2013), 18,366 (2014E), 26,342 (2015E), 32,263 (2016E)
• Online Advertising (RMB m): 5,034 (2013), 8,126 (2014E), 10,411 (2015E), 12,875 (2016E)
• E-commerce Transactions (RMB m): 9,796 (2013), 4,907 (2014E), 2,454 (2015E), 2,699 (2016E)
• Gross Profit Margin (%): 54 (2013), 61 (2014E), 63 (2015E), 62 (2016E)
• EBIT Margin (%): 32 (2013), 39 (2014E), 39 (2015E), 40 (2016E)

Key Executives

• Ma Huateng: Executive Director, Chairman and Chief Executive Officer (Age: 42, Joined: 1999)
• Zhang Zhidong: Executive Director, Chief Technology Officer (Age: 42, Joined: 1999)
• Lau Chi Ping Martin: Executive Director, President (Age: 40, Joined: 2005)

Conclusion

• Target Price Adjustment: The lower target price reflects reduced earnings estimates, not changed assumptions.
• Overall Outlook: Reiterate BUY, with confidence in Tencent's ability to leverage its dominant platforms for monetisation.