20181115-招商证券_香港_-腾讯控股-00700.HK-Dual_engines_propel_the_Company_thru_the_NT_pessimism_10页_998kb

Tencent (700 HK) Summary

Core Content

This report provides an analysis of Tencent's performance and outlook, focusing on its financial results for 3Q18, business segments, and updated valuation.

Main Points

Financial Performance (3Q18)

• Revenue: Increased by 24% YoY to RMB19.5bn, exceeding consensus by 1%.
• Non-GAAP Net Profit: Grew by 15% YoY to RMB19.5bn, surpassing consensus by 6%.
• Operating Profit: Rose by 22% YoY to RMB27.9bn.
• Non-GAAP Operating Profit: Increased by 4% YoY to RMB22.6bn.
• Non-GAAP Diluted EPS: Rose to RMB2.06, up 15% YoY.
• Gross Margin: Declined to 44.0%, reflecting a 4.6pp YoY decrease and 2.7pp QoQ decrease, due to the increasing share of mobile games and lower-margin segments.

Business Segments

• Mobile Game Revenue: Grew by 7% YoY and 11% QoQ to RMB19.5bn, driven by new avatar personalization items and IP conversions.
• PC Game Revenue: Declined by 15% YoY and 4% QoQ to RMB12.4bn, due to user migration from PC to mobile and a high base in the previous year.
• Online Advertising Revenue: Increased by 15% YoY to RMB16.2bn, with the segment contributing 36.7% of total revenue.
• Others (Payment & Cloud): Revenue grew to RMB20.3bn, with a 22.8% gross margin, contributing 25% of total revenue.

Regulatory and Strategic Updates

• Regulation on Gaming: The update is aimed at reducing children's game addiction and eliminating gambling-related games. Tencent has implemented the Health Gameplay System, including real ID verification and facial recognition.
• License Resumption: Expected to resume in late 1Q19, likely after the NPC & CPPCC meetings.
• Pipeline: Tencent has 15 games with monetization approval, mainly RPG and action games with strong IPs.
• Business Structure Change: The shift to a more diversified business model with consumer internet (2C) and industrial internet (2B) is expected to provide long-term growth potential.

Key Information

Earnings Revisions

• Revised Non-GAAP Net Income: Up by 4% / 2% for FY18E / FY19E.
• Revised Revenue: Up by 1% / 2% for FY18E / FY19E.
• Mobile Gaming Revenue: Revised up by 6% / 5% to RMB77bn / RMB91bn in FY18E / FY19E.
• Online Advertising Revenue: Revised up by 2% / 7% to RMB58.8bn / RMB81.5bn in FY18E / FY19E.
• Others Revenue: Revised up by 78% / 53% to RMB77bn / RMB118bn in FY18E / FY19E.

Valuation

• Target Price (TP): HK$414, implying a 36x FY19E P/E.
• Current P/E: Trading at 25x FY19E P/E.
• SOTP Valuation: Based on the following:
  • Online Gaming: 15x FY19E EV/EBITDA (vs. peers’ average at 13.5x).
  • SNS: 22x.
  • Online Advertising: 17x.
  • Payment & Cloud: 6.0x P/S.
  • Investments: Including JD.com, 58.com, Didi, etc.
  • Net Cash: HK$6 per share.
• Value Per Segment:
  • Online Games: HK$106 (26% of total).
  • SNS (excl. mobile games): HK$101 (24%).
  • Online Advertising: HK$67 (16%).
  • Payment & Cloud: HK$85 (20%).
  • Net Cash: HK$6 (2%).

Downside Risks

1. Postponement of Gaming Monetization Approval Resumption.
2. Growth Volatility in Mobile Games and Advertising.
3. Deceleration in ARPU and MAU Growth.
4. Rising Content Acquisition Costs.
5. Regulatory Risks in Mobile Payment and Internet Finance.

Summary Table

Key Ratios

Conclusion

Tencent is expected to maintain strong growth in its mobile gaming and online advertising segments despite regulatory challenges. The revised target price of HK$414 reflects the company's diversified business model and long-term growth potential. The report maintains a BUY recommendation with the target price based on a detailed SOTP valuation approach. However, there are potential risks that may impact the company's performance.