20180322-招商证券_香港_-腾讯控股-00700.HK-Invest_for_future_growth,_spending_to_weigh_on_ST_margin_12页_1mb

Tencent (700 HK) Summary

Core Content and Key Highlights

Tencent's 4Q17 financial results and strategic initiatives reflect a mixed performance with revenue growth slightly below expectations, while non-GAAP net income exceeded forecasts. The company's strategic focus on long-term growth involves increased investments in content, payment, AI, and smart retail, which may affect short-term margins.

Key Financial Performance

• 4Q17 Revenue: RMB66.4bn, up 51% YoY and 2% QoQ, missing estimates by 2% and consensus by 3%.
• Non-GAAP Net Income: RMB17.5bn, up 42% YoY, beating forecasts by 3% and consensus by -5%.
• Gross Margin: 47.4%, down 6.4pp YoY and 1.1pp QoQ, primarily due to rising content, channel, and traffic acquisition costs.
• Operating Profit: Up 12% YoY and 24% QoQ, driven by higher-than-expected other gains and lower-than-expected SG&A expenses.
• Non-GAAP Earnings: Expected to grow 35% / 25% YoY in FY18/19E, with forecasts 4% / -2% vs. consensus.

Strategic Initiatives for Future Growth

• Content Investment: Focus on digital content, including long and short-form video, to grow the subscriber base.
• Payment Services: Increased subsidies for merchants and users starting in 1Q18, expanding its leadership in mobile payment.
• AI Technologies: Investment in AI for advertising targeting, recommendation algorithms, and healthcare.
• Smart Retail: Leveraging technology to empower offline retail, enhancing the retail ecosystem.

Key Business Segments

• Mobile Gaming: Revenue up 59% YoY but down 7% QoQ to RMB16.9bn. The decline was attributed to HoK's scaled back monetization and RPG games entering post-launch consolidation. However, new games like QQ Speed and PUBG show promise for recovery in 1Q18.
• PC Gaming: Revenue increased 13% YoY but declined 12% QoQ to RMB12.8bn. Active users migrated to mobile, and reduced item-sales marketing impacted revenue.
• SNS Services: Revenue rose 56% YoY and 2% QoQ to RMB15.58bn, driven by digital content services and social advertising demand.
• Digital Content: Tencent Video became the leading video streaming platform in China, with over 137mn mobile DAU and 56mn subs. The company also upgraded its Open Media Platform for better content curation.
• Online Advertising: Grew 49% YoY and 12% QoQ to RMB12.36bn. Social advertising growth accelerated to 68% YoY, while media advertising growth slowed to 22% YoY.
• Others: Surged 121% YoY and 17% QoQ to RMB14.1bn, driven by payment and cloud services, which are expected to grow significantly in FY18/19E.

Investment and Valuation

• Target Price (TP): Raised from HK$500 to HK$550, reflecting exchange rate adjustments and valuation appreciation of major investees.
• SOTP Valuation: Based on multiples of 15x EV/EBITDA for online gaming, 30x for SNS and payment, 1.2x PEG for advertising, and accounting for major investments and net cash.
• P/E Ratio: Implies 44x FY19 P/E, while the company is currently trading at 37x FY19E P/E.

Main Points

• Tencent's 4Q17 revenue missed estimates but non-GAAP net income exceeded expectations, indicating strong underlying performance.
• The company is investing heavily in content, payment, AI, and smart retail, which are expected to drive future growth but may temporarily reduce margins.
• Mobile gaming revenue growth was strong, but the segment faced QoQ declines due to monetization strategies and post-launch user consolidation.
• SNS and online advertising segments showed robust growth, with social advertising outperforming media advertising.
• The company's strategic initiatives are expected to lead to improved performance in the coming quarters, supported by new game launches and enhanced monetization.

Key Information

• 4Q17 Revenue Growth: 51% YoY, 2% QoQ.
• Non-GAAP Net Income Growth: 42% YoY.
• Investment Areas: Content, payment, AI, smart retail.
• Target Price: HK$550, up from HK$500.
• P/E Ratio: 44x FY19, with current trading at 37x FY19E.
• MAU Growth: WeChat MAU expanded to 989mn, while QQ and Qzone MAUs declined.

Conclusion

Tencent is maintaining a BUY rating with a raised target price, reflecting confidence in its long-term growth potential despite short-term margin pressures. The company's strategic investments and new product launches are expected to drive future revenue and profitability.