20150519-高盛-Removed_from_Asia_Pacific_Conviction_Buy_List_Tencent_Holdings__0700.HK__30页_792kb

Tencent Holdings (0700.HK) Summary

Core Content

Tencent Holdings has been removed from the Asia Pacific Conviction Buy List but remains a Buy recommendation due to its strong growth potential and positive fundamentals. The report highlights Tencent's dominant position in the Chinese market for communications, gaming, and social media, as well as its strategic advantages in monetizing mobile traffic and P4P (pay-for-performance) advertising.

Main Points

• P4P Advertising Growth:

  • P4P advertising revenue in Q1 2015 reached Rmb1.3bn (US$210mn), showing a 199% year-over-year increase.
  • Mobile P4P ads are expected to grow significantly, with the potential to generate US$1.2bn to US$2.1bn per quarter over the next 3-5 years.
  • Tencent's P4P ad growth is driven by its ecosystem, which allows for better targeting and higher relevance, resulting in comparable click-through rates (CTR) to Facebook.

• Games Segment:

  • Online gaming (including PC and mobile) continues to be a strong revenue driver for Tencent.
  • The company has a track record of introducing new games and genres, leading to increased paying gamers and higher ARPU (average revenue per user).
  • PC games have shown double-digit growth in Q1 2015, and mobile games are expected to maintain strong performance due to higher stickiness and user engagement.

• Margin Improvements:

  • Margins are expected to rise as Tencent transitions to higher-margin P4P advertising.
  • The company is becoming less aggressive with promotions and is focusing on equity investments in its verticals, which are expected to yield higher returns.

• Valuation and Price Target:

  • The 12-month price target has been raised to HK$180 from HK$150, based on a 1.2x PEG (price-to-earnings growth) ratio.
  • The stock has outperformed the MSCI China index by 30% since being added to the Conviction List in January 2015, while Alibaba and Baidu have underperformed by -15%.

• Investment Strategy:

  • Tencent has been rationalizing its investments over the past 18 months, leading to a slowdown in the pace of investment.
  • The company is shifting from direct promotional spending to equity investments in its investee companies, which are expected to improve overall returns.

Key Financials

Risk Factors

• Intense competition in the social media and advertising space.
• Potential slowdown in game revenue.
• Slower-than-expected growth in social ad monetization.

Investment Highlights

• Market Position: Tencent holds a strong position in China's online gaming and social media sectors, with a robust ecosystem that supports its advertising and monetization strategies.
• Monetization Strategy: The company is capitalizing on the shift to mobile advertising, with P4P ads expected to be a major growth driver.
• Growth Prospects: With a 25%-30% CAGR in earnings and rising margins, Tencent is well-positioned for future growth.
• Valuation: Despite being removed from the Conviction List, the stock is still considered a Buy based on its strong fundamentals and growth potential.

Conclusion

Tencent remains a strong investment due to its leadership in key sectors, strategic focus on mobile monetization, and the potential for significant revenue growth from P4P advertising. While the stock has outperformed the MSCI China index and global peers, the firm has adjusted its valuation approach, raising its price target and removing it from the Conviction List due to its current relative valuation.