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Tencent Holdings Summary

Core Content

Tencent is a leading Chinese Internet service portal with a strong presence in mobile technology and online gaming. The company is recognized for its innovative WeChat app, which has been expanding its service offerings and user base. The report highlights Tencent's potential for continued revenue growth, driven by its mobile and online game businesses, and its strategic position in the global mobile social platform (GMSP) market.

Main Points

• WeChat Innovations: Tencent has introduced new features to WeChat, including mobile payment solutions, taxi-hiring services, financial products, and O2O services, which enhance user experience and expand its ecosystem.
• Growth Outlook: The company's revenue is projected to grow at a CAGR of 38% for 2013-15, with WeChat contributing significantly to this growth.
• Revenue Forecasts:
  • 2014: WeChat revenue is forecasted to reach CNY6.5bn (up from CNY4.9bn), and the app is expected to account for 7% of Tencent's total revenue.
  • 2015: WeChat revenue is forecasted to reach CNY11.8bn, contributing 10% to total revenue.
• Earnings Forecasts:
  • 2014: Core EPS (fully-diluted) is forecasted to be CNY11.847, up from CNY8.218 in 2013.
  • 2015: Core EPS (fully-diluted) is forecasted to be CNY16.075, with a forecasted EPS CAGR of 33% for 2013-15.
• Target Price: The 6-month target price for Tencent is raised to HKD710 from HKD500, based on a target PER of 40x, aligning with its domestic peers.
• Earnings Revisions: The new forecasts are 8% and 15% higher than the Bloomberg consensus for 2014 and 2015, respectively.
• Market Position: Tencent is well-positioned to become a leading global mobile social platform and is expected to maintain a strong user base, with a forecast of 800m registered users by the end of 2014.

Key Financial Highlights

Key Ratios

Strategic Moves

• Mobile Payment Expansion: Tencent has expanded its mobile payment features on WeChat, including AA payment and financial services, aiming to monetize these offerings and build a comprehensive O2O ecosystem.
• Acquisitions and Partnerships:
  • Acquired a 37% stake in Sogou to strengthen its search business.
  • Acquired a 20% stake in Dianping to enhance its online-to-offline services.
• O2O Ecosystem: The company is developing a broad O2O ecosystem through its mobile gateways, WeChat and mobile QQ, with a focus on integrating new services and enhancing user engagement.

Revenue and Earnings Growth

• Online Games: The online game business continues to be a strong revenue driver, with the launch of Blade & Soul (B&S) in November 2013 contributing significantly to growth.
• Revenue CAGR: Expected to be 41% for the online game business from 2013 to 2015.
• Key Titles: B&S, We Runner, Rhythm Master, and Daily Racing are among the top contributors to Tencent's revenue from online games.

Risks

• Monetization: Slower-than-expected monetization of WeChat could impact growth.
• Marketing Expenses: Higher-than-expected marketing expenses may affect profitability.

Recommendations

• Investment Rating: Buy (unchanged), with further rerating potential due to strong revenue growth and a compelling mobile story.
• Valuation: The stock is expected to continue being rerated as the company's performance improves.

Conclusion

Tencent is a key player in the Chinese Internet and mobile gaming sectors, with a strong growth trajectory driven by WeChat and its online game business. The company's strategic investments and innovative features position it well for future success, although it faces risks related to monetization and marketing costs. The report reaffirms the Buy rating with a raised target price, indicating confidence in Tencent's long-term prospects.