Tencent Holdings Summary (DBS Group Research - Equity)
Core Content
Tencent is a leading operator of online games and ads in China, and the report recommends a BUY rating with a Price Target of HK$184, which represents a 19% upside from the last traded price of HK$154.50. The key growth drivers are developments in online ads and e-payment, as well as robust growth in mobile game revenue.
Main Points
- Revenue Growth: The report forecasts a 23% y-o-y revenue growth in 2Q15 and a core profit growth of 30%.
- Online Ads: Tencent is expected to achieve 89% growth in online ad revenue for 2Q15, driven by strong performance on Tencent's social network and video platforms.
- Core Net Margin: The core net margin is projected to increase by 1.9ppts y-o-y to 31.5% due to rising contributions from high-margin segments such as performance-based ads.
- Valuation: Tencent is currently trading at c.30x 12-month rolling core PE, and the Target Price is based on 36x 12-month rolling core PE.
- Market Share: According to a survey by DCCI, >70% of ad clients believe Weixin and Tencent Video are the best advertising channels, ranking No.1 in their respective segments.
Key Financial Metrics
| Metric |
FY14A |
FY15F |
FY16F |
FY17F |
| Turnover (RMB m) |
78,932 |
99,012 |
125,160 |
158,615 |
| EBITDA (RMB m) |
33,751 |
42,346 |
53,430 |
66,851 |
| Pre-tax Profit (RMB m) |
29,013 |
36,295 |
46,709 |
59,366 |
| Net Profit (RMB m) |
23,810 |
29,516 |
38,453 |
48,872 |
| Core Profit (non-GAAP) (RMB m) |
24,224 |
32,880 |
42,296 |
53,305 |
| Core EPS (HK$) |
3.30 |
4.48 |
5.76 |
7.27 |
| Core EPS (RMB) |
2.64 |
3.59 |
4.62 |
5.82 |
| Core EPS Growth (%) |
42.7 |
35.7 |
28.6 |
26.0 |
| DPS (HK$) |
0.44 |
0.55 |
0.71 |
0.91 |
| BV Per Share (HK$) |
10.73 |
14.16 |
18.63 |
24.31 |
| Core PE (X) |
46.8 |
34.5 |
26.8 |
21.3 |
| P/Cash Flow (X) |
34.7 |
31.3 |
24.3 |
19.4 |
| P/Free CF (X) |
42.4 |
36.4 |
28.0 |
22.3 |
| EV/EBITDA (X) |
32.1 |
25.1 |
19.5 |
15.1 |
| Net Div Yield (%) |
0.3 |
0.4 |
0.5 |
0.6 |
| P/Book Value (X) |
14.4 |
10.9 |
8.3 |
6.4 |
| ROAE (%) |
34.5 |
31.8 |
31.4 |
30.5 |
Investment Thesis
Profile
- Dominant Leader: Tencent is a dominant leader in China's online game industry.
- Mobile Game Exposure: It has increasing exposure to the fast-growing mobile game segment.
- Monetization Potential: It benefits from a large active user base on Weixin and Mobile QQ, offering good monetization potential.
Rationale
- Leading Online Game Player: Tencent holds leading positions in client games and web games.
- Online Ads Segment: It is leveraging its "Guangdiantong" ads system to offer more performance-based ads on its key platforms, which is expected to drive growth and profitability.
Peer Comparison
| Company Name |
PE 15F |
PE 16F |
P/Sales 15F |
P/Sales 16F |
ROE 15F |
ROE 16F |
| Tencent Holdings*^ |
34.5 |
26.8 |
11.7 |
9.3 |
31.8 |
31.4 |
| HC International |
16.8 |
10.2 |
3.6 |
2.7 |
14.9 |
14.9 |
| Cogobuy Group |
27.3 |
18.9 |
1.0 |
0.8 |
27.5 |
27.5 |
| Boyaa Interactive Intl. |
7.9 |
6.4 |
2.4 |
1.9 |
21.2 |
21.2 |
| Forgame Holdings |
27.4 |
14.8 |
2.5 |
1.9 |
2.8 |
2.8 |
| Netdragon Websoft |
69.8 |
41.3 |
8.2 |
6.3 |
2.2 |
2.2 |
| Kingsoft |
33.5 |
18.6 |
4.3 |
2.8 |
12.1 |
12.1 |
| Haier Electronics* |
13.4 |
11.3 |
0.6 |
0.5 |
22.6 |
22.6 |
| Gome* |
14.6 |
13.3 |
0.3 |
0.3 |
7.8 |
7.8 |
| JD.Com*^ |
821.6 |
148.4 |
1.7 |
1.2 |
n.a. |
n.a. |
| Baidu |
29.9 |
22.4 |
6.6 |
5.0 |
25.8 |
25.8 |
| VIPShop |
38.4 |
24.6 |
1.9 |
1.3 |
52.7 |
52.7 |
| Dangdang |
n.a. |
17.8 |
0.3 |
0.3 |
(6.3) |
(6.3) |
| Jumei Int'l |
36.7 |
21.0 |
2.5 |
1.8 |
13.6 |
13.6 |
| Qihoo 360 |
18.6 |
13.4 |
4.2 |
3.2 |
33.6 |
33.6 |
| Average |
27.2 |
18.0 |
3.9 |
2.9 |
15.9 |
15.9 |
Key Assumptions
- MAU of QQ: Expected to grow from 808.0m in FY13 to 833.4m in FY17.
- Smart Device MAU of QQ: Projected to increase from 426.0m in FY13 to 804.7m in FY17.
- Combined MAU of Weixin & WeChat: Projected to increase from 355.0m in FY13 to 787.4m in FY17.
Segmental Breakdown (RMB m)
| Segment |
FY13A |
FY14A |
FY15F |
FY16F |
FY17F |
| Value Added Services (VAS) |
44,985 |
63,310 |
78,970 |
95,574 |
112,655 |
| Online Advertising |
5,034 |
8,308 |
15,873 |
27,435 |
43,422 |
| Others |
10,418 |
7,314 |
4,169 |
2,151 |
2,538 |
| Total |
60,437 |
78,932 |
99,012 |
125,160 |
158,615 |
Growth and Margins
| Metric |
FY13A |
FY14A |
FY15F |
FY16F |
FY17F |
| Revenue Growth (%) |
37.7 |
30.6 |
25.4 |
26.4 |
26.7 |
| EBITDA Growth (%) |
23.4 |
45.9 |
25.5 |
26.2 |
25.1 |
| Opg Profit Growth (%) |
19.3 |
54.6 |
33.7 |
26.1 |
25.2 |
| Net Profit Growth (%) |
21.8 |
53.6 |
24.0 |
30.3 |
27.1 |
| Gross Margin (%) |
54.0 |
60.9 |
62.4 |
63.1 |
62.8 |
| Opg Profit Margin (%) |
31.2 |
36.9 |
39.3 |
39.2 |
38.8 |
| Net Profit Margin (%) |
25.6 |
30.2 |
29.8 |
30.7 |
30.8 |
| ROAE (%) |
34.5 |
31.8 |
31.4 |
30.5 |
30.5 |
Ratings and Target Price History
| S.No. |
Date |
Closing Price |
Target Price |
Rating |
| 1 |
3-Dec-14 |
HK$119.60 |
HK$148 |
Buy |
| 2 |
28-Jan-15 |
HK$132.70 |
HK$156.00 |
Buy |
| 3 |
19-Mar-15 |
HK$135.90 |
HK$163.00 |
Buy |
| 4 |
14-Apr-15 |
HK$170.50 |
HK$182.00 |
Buy |
| 5 |
14-May-15 |
HK$156.80 |
HK$184 |
Buy |
| 6 |
3-Jun-15 |
HK$158.10 |
HK$184 |
Buy |
| 7 |
19-Jun-15 |
HK$154.2 |
HK$184 |
Buy |
Disclaimer
This report is intended for clients of DBS Group only and is not to be used for any other purpose without prior written consent. The information is based on sources believed to be reliable but not guaranteed for accuracy or completeness. Opinions and forecasts are subject to change without notice. No liability is accepted for any losses resulting from the use of this document.
