20220120-招银国际-腾讯控股-00700.HK-Factoring_in_ads___games_headwinds_4页_803kb

Tencent (700 HK) Company Update Summary

Core Content

This document provides an equity research update on Tencent (700 HK) by CMB International Securities, highlighting the company's financial performance, outlook, and valuation. The analysis covers the performance of Tencent's key segments—games, ads, and FBS (Financial Business Services)—and the overall financials for FY19A to FY23E. The report also includes a BUY recommendation with a target price of HK$590 and discusses the impact of macroeconomic conditions and regulatory changes on the company's performance.

Main Points

Financial Outlook

• 4Q21E is expected to be a soft quarter with:
  • Revenue growth: +5.5% YoY
  • Adj. net profit growth: -25% YoY
  • These figures are 5% and 19% below consensus, respectively.
• 1Q22E is also expected to be challenging, with:
  • Revenue growth: +5% YoY
  • Adj. net profit growth: -19% YoY
• FY22E sees a reset in revenue growth for ads and games:
  • Ads: +0% YoY
  • Games: +7% YoY
• 2H22E is anticipated to show gradual recovery in ads, with a positive YoY growth expected due to an easy base and macroeconomic recovery.
• Long-term momentum is expected to come from solid game product cycles and overseas expansion.

Earnings Revisions

• Earnings for FY21E to FY23E have been trimmed by 3-11% to reflect a conservative financial outlook.
• New target price (TP) is set at HK$590, which is 35x FY22E P/E.
• Downside risk is limited due to already-low market expectations and ongoing share buybacks.

Segment Performance

• Games:
  • 4Q21E: Expected to grow +4% YoY, down from +8% YoY in 3Q21E.
  • Reasons for slowdown: Limited contribution from LoLM, minors protection regulations, and few new titles due to license suspension.
• Ads:
  • 4Q21E: Expected to decline -14% YoY due to multiple headwinds from 2H21E, including tightening regulations and softer macroeconomic conditions.
  • 1Q22E: Expected to remain flat +0% YoY, with positive growth expected in 2H22E.
• FBS: Expected to remain largely on track with +21% YoY growth in 4Q21E.

Financial Performance Overview

Key Ratios

• Revenue Growth: 20.7% (FY19A), 27.8% (FY20A), 15.5% (FY21E), 10.8% (FY22E), 14.5% (FY23E)
• Gross Profit Growth: 17.9% (FY19A), 32.2% (FY20A), 12.4% (FY21E), 10.1% (FY22E), 14.7% (FY23E)
• Adj. Net Margin: 25.0% (FY19A), 25.5% (FY20A), 22.2% (FY21E), 21.3% (FY22E), 22.2% (FY23E)
• ROE: 23.9% (FY19A), 21.8% (FY20A), 17.4% (FY21E), 15.2% (FY22E), 14.2% (FY23E)

Shareholding Structure

Stock Performance

Current Price and Target Price

• Current Price: HK$442
• Target Price: HK$590
• Downside/Upside: 33.5%

Investor Recommendations

• Maintain BUY rating
• Buy on dips, supported by share buybacks and limited downside risk on valuation

Key Information

• Auditor: PwC
• Related Reports:
  1. Looking beyond 2H21 ads headwinds - 11 Nov 2021
  2. China Internet: Embracing a new normal of regulation - 8 Nov 2021
  3. Moving into 4Q21E games rebound - 29 Oct 2021
• Market Cap: HK$4,420,156 million
• Average 3-month Turnover (HK$ million): HK$9,259.04
• 52-week High/Low (HK$): 775.5 / 412.2
• Total Issued Shares (mn): 9,609

CMBIS Ratings

• BUY: Stock with potential return of over 15% over next 12 months
• MARKET-PERFORM: Stock with potential return of +15% to -10% over next 12 months
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark over next 12 months
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark over next 12 months
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark over next 12 months

Disclosures

• The research analyst certifies that all views expressed reflect personal opinions and no compensation is tied to the report's content.
• The analyst confirms no trading in the covered stocks within 30 days before the report's issue.
• CMBIS has an investment banking relationship with the covered issuers in the past 12 months.
• The report is not an offer or solicitation to buy/sell any security.
• Conflicts of interest may exist due to business relationships, and CMBIS does not assume responsibility for the report's objectivity.
• The report is intended for specific recipients and may not be reproduced or distributed without prior consent.

Conclusion

Tencent is expected to experience challenging quarters in 4Q21E and 1Q22E due to ads and games headwinds, but long-term momentum is anticipated from product cycles and overseas expansion. The company is revising its earnings conservatively and has initiated share buybacks, which may support the stock price in the near term. Despite the downside, the target price is HK$590, and the BUY recommendation is maintained.