20181208-兴业金融证券-腾讯控股-00700.HK-Preview__Online_Games__Headwinds_Remain__Keep_BUY_7页_372kb

Tencent Summary

Core Content

Tencent, a leading Chinese technology company, is under review for its stock performance and business outlook. The report highlights the challenges the online games sector is facing, while also emphasizing the potential of Tencent's Weixin ecosystem. The analyst maintains a Buy rating, with a new target price of HKD390, down from HKD450, implying a 33% upside from the current price. The dividend yield is expected to be 0.47% for FY19F, with the valuation based on a 32x FY19F P/E ratio.

Main Points

• Online Games Segment:

  • The online games industry is facing regulatory challenges, with the approval authorities restructuring and potentially setting new criteria and quotas for license issuance.
  • There is uncertainty about the timing of resuming game licensing approvals.
  • Tencent's online games revenue is expected to decline sequentially in 3Q18, with Honor of Kings experiencing a significant drop in revenue.
  • The analyst has cut earnings forecasts for FY18F-20F by 3%, 8%, and 6%, respectively, due to lower expectations for online games.

• Online Advertising:

  • Despite macroeconomic weakness and competition, the online advertising segment is expected to deliver solid growth.
  • Small and medium clients are showing rapid growth in ad revenue.
  • Large clients have shown growth weakness, and competition from Toutiao (Douyin) is a concern.
  • Weixin is testing more ad loads, increasing from 2 to 3 ads per user per day, with plans to eventually trial 4. This is seen as a key growth driver for the ad business.

• 3Q18 Forecast:

  • Revenue: CNY78.75bn (+21% YoY)
  • Non-GAAP Profit: CNY18.74bn (+24% YoY)
  • Recurring EPS: CNY10.18 (FY19F) and CNY8.13 (FY18F)
  • Recurring P/E: 25.06 (FY19F) and 31.38 (FY18F)

• Valuation Trends:

  • P/E ratio has been declining over time, from 53.33 (Dec-16) to 19.34 (Dec-20F).
  • P/B ratio is also decreasing, from 13.70 (Dec-16) to 6.33 (Dec-20F).
  • Dividend Yield is increasing, from 0.21% (Dec-16) to 0.62% (Dec-20F).
  • Non-GAAP earnings CAGR: Expected to be 25% for FY17-20, down from 27%.

• Market Performance:

  • The stock has corrected significantly, improving the risk/reward profile.
  • Estimated Return: 33%
  • Market Cap: USD360,413m
  • Share Performance: Negative over various time frames, with the Absolute Return at -27.73% YTD and the Relative Return at -15.13% YTD.

Key Information

• Weixin Ecosystem: Seen as a strong growth driver, though not yet fully monetised.
• Investment Rating: Buy (Maintained), with a PEG of 1.3x.
• Earnings Growth: The analyst expects non-GAAP earnings to grow at a CAGR of 25% for FY17-20.
• Competition: Increasing competition from Toutiao (Douyin) in both user engagement and advertising budgets.
• Regulatory Impact: New regulations may lead to higher compliance and R&D costs for online games.

Financial Forecasts

Investment Considerations

• Buy Rating Justification: The risk/reward profile has improved due to the stock's correction.
• Future Outlook: The longer-term outlook for Tencent remains uncertain, but the Weixin ecosystem offers strong potential.
• Recommendation: Investors are advised to make their own informed decisions, as the report does not constitute investment advice.

Disclaimer

• The report is for information purposes only and does not constitute an offer to buy or sell.
• All estimates, projections, and opinions are based on assumptions and subject to change.
• Forward-looking statements are not guaranteed and subject to risks.
• The report is confidential and not to be copied or distributed without prior consent.
• Investors should seek independent advice and understand the risks involved in investing in the securities discussed.