Tencent (700 HK) - CMB International Securities Company Update
Core Content Summary
Tencent reported strong performance in Q3 2020, with revenue and adjusted net profit growing by 29% and 32% YoY, respectively, surpassing market expectations by 1% and 2%. The company's mobile game segment drove significant growth, increasing by 61% YoY, which was well above the market consensus of -50% YoY. This performance helped alleviate concerns about a slowdown in large game revenue post-pandemic. Despite a slowdown in cloud services, the company's diversified revenue streams and compliance strategy suggest limited impact from regulatory pressures on fintech and antitrust.
The report highlights Tencent's strong game pipeline, including titles like PUBG Mobile and CoD Mobile, which are expected to drive further growth. The company also sees upside from video ads, with the segment showing acceleration in Q3 2020. Additionally, the report mentions that the newly launched game Moonlight Blade (天涯明月刀) ranked Top 5 in iOS grossing rankings, indicating strong market performance.
Key Financial Highlights
Earnings Summary
| Metric |
FY18A (RMB mn) |
FY19A (RMB mn) |
FY20E (RMB mn) |
FY21E (RMB mn) |
FY22E (RMB mn) |
| Revenue |
312,694 |
377,289 |
480,072 |
591,876 |
723,980 |
| Net income |
78,719 |
93,310 |
126,642 |
154,112 |
185,171 |
| Adj. net profit |
77,296 |
93,637 |
121,756 |
153,181 |
185,802 |
| Adj. EPS (RMB) |
8.1 |
9.8 |
12.7 |
16.0 |
19.3 |
| P/E (x) |
64.1 |
52.9 |
40.8 |
32.4 |
26.8 |
| P/B (x) |
15.2 |
12.6 |
9.1 |
7.4 |
6.1 |
3Q20 Performance
- Revenue: RMB125.4bn (+29% YoY), slightly above consensus.
- Adj. net profit: RMB32.3bn (+32% YoY), 2% above consensus.
- Game revenue: RMB43.953bn (+45% YoY), driven by mobile games (+61% YoY).
- Ads revenue: RMB21.351bn (+16% YoY), with social ads growing +21% YoY and media ads decreasing -1% YoY.
Key Views
- Game Momentum: Continued strong growth in the gaming segment, especially mobile games, with a solid pipeline of upcoming titles expected to further boost performance.
- Ads Growth: Advertising revenue is expected to accelerate in Q4 2020, supported by popular drama series and recovering brand ad sentiment.
- Regulatory Impact: The company's diversified revenue sources and compliance strategy are expected to limit the impact of regulatory pressures on fintech and antitrust.
- Valuation: The target price was raised from HK$624 to HK$669, implying a 38x FY21E P/E, reflecting higher investment valuations.
Analyst Recommendations
- Rating: BUY (Maintain)
- Target Price: HK$669
- Previous Target Price: HK$624
- Upside/Downside: +16.0% from current price of HK$577
Shareholding and Performance
Shareholding Structure
| Holder |
% Ownership |
| Naspers |
30.9% |
| Ma Huateng |
7.4% |
| JP Morgan |
4.4% |
Share Performance
| Period |
Absolute Return (%) |
Relative Return (%) |
| 1-mth |
10.3 |
1.1 |
| 3-mth |
18.5 |
9.9 |
| 6-mth |
42.3 |
31.1 |
Market Cap and Trading
- Market Cap: HK$5,281,185 million
- Average 3-month Turnover: HK$9,648.43 million
- 52-week High/Low: HK$633 / HK$318
Financial Forecast and Valuation
SOTP Valuation
| Segment |
Valuation (HK$ bn) |
HK$/Share |
Implied FY21 P/E |
| Core business |
5,352 |
559 |
32x |
| Unlisted associates |
120 |
13 |
- |
| JD |
235 |
25 |
- |
| 58.com |
22 |
2 |
- |
| Meituan |
424 |
44 |
- |
| Total Valuation |
6,406 |
669 |
38x |
Key Ratios
| Metric |
FY18A (%) |
FY19A (%) |
FY20E (%) |
FY21E (%) |
FY22E (%) |
| Revenue Growth |
31.5 |
20.7 |
27.2 |
23.3 |
22.3 |
| Gross Margin |
46.6 |
44.1 |
45.2 |
44.8 |
44.2 |
| Operating Margin |
43.0 |
31.0 |
35.0 |
32.0 |
31.2 |
| Adj. net margin |
24.5 |
26.5 |
25.8 |
25.9 |
25.7 |
| ROE |
25.4 |
23.9 |
23.8 |
24.9 |
25.5 |
Analyst Certification and Disclaimer
- The analyst certifies that the views expressed in the report reflect their personal views and that there are no conflicts of interest.
- CMBIS has an investment banking relationship with the issuers covered in the report within the past 12 months.
- The report is for informational purposes only and does not constitute investment advice. It is not an offer to buy or sell securities.
- CMBIS is not a registered broker-dealer in the U.S., and the report is intended for major U.S. institutional investors only.
Conclusion
Tencent's Q3 2020 results were strong, with continued growth in mobile games and advertising. The company's diversified revenue sources and compliance strategy are expected to mitigate regulatory risks. The updated target price reflects improved investment valuations and a positive outlook on its future performance. The report recommends maintaining a BUY rating with a target price of HK$669.
