20221028-招银国际-腾讯控股-00700.HK-Ecosystem_value_and_growing_diversification_15页_1mb

Tencent (700 HK) Summary

Core Content

Tencent is a major player in the Chinese internet industry, with a strong focus on leveraging its WeChat ecosystem to drive growth and maintain a competitive edge amid slowing macroeconomic conditions. The company's strategy emphasizes the expansion of enterprise and fintech services, which are expected to become key long-term growth drivers. The ecosystem provides a defensive advantage by offering extensive social, content, and utility value to users, enhancing competitiveness and ROI for merchants and content contributors without compromising user experience.

Main Points

• Ecosystem Strategy:

  • The WeChat ecosystem is a key defensive asset.
  • Video account development marks the beginning of deploying comprehensive social features.
  • The ecosystem supports user experience and monetization balance, crucial for maintaining leadership in the competitive consumer internet space.

• Growth Drivers:

  • Enterprise and fintech services are expected to drive long-term growth.
  • Infrastructure support for real economy industries, such as AI, cloud computing, and IoT, is a strategic focus.
  • The company is investing in digital transformation across multiple sectors.

• Revenue Recovery and Earnings Outlook:

  • Revenue is expected to decline by 0.4% YoY in 2022E, then rebound by 10.0% and 8.2% in 2023E and 2024E respectively.
  • Non-IFRS net profit is forecasted to decline by 8.5% YoY in 2022E, but recover by 15.2% and 12.7% in 2023E and 2024E respectively.
  • Adjusted EPS is expected to rise from RMB11.7 in 2022E to RMB15.2 in 2023E and RMB18.4 in 2024E.

• Valuation:

  • Current price is HK$213.20, trading at 17x 2023E PE or 10x if excluding strategic investment and net cash.
  • Target price is HK$398.00, with an upside of 86.7%.
  • SOTP-derived TP includes contributions from gaming, SNS, ad, fintech, cloud, net cash, and strategic investment.

• Market Performance:

  • 12-month price performance is shown with a chart.
  • Shareholding structure includes MIH TC at 28.7% and Advance Data Services Limited at 8.4%.

Key Business Segments

Gaming (30.6% of 2022E revenue)

• Expected to decline by 2.1% YoY to RMB170.6bn in 2022E due to lack of new titles and regulatory constraints.
• Forecasted to recover by 7.6% and 6.1% YoY to RMB183.6bn and RMB194.8bn in 2023E and 2024E, respectively.
• Overseas gaming revenue growth is expected to reaccelerate in 2023E with a solid global pipeline.

Online Advertising (14.6% of 2022E revenue)

• Expected to return to positive YoY growth in 4Q22 (+1.2% YoY) as the pandemic impact eases and Weixin Video Account monetization improves.
• Video Account is projected to generate RMB3.2bn in 2022E, rising to RMB27.4bn in 2024E, accounting for 28% of total ad revenue.
• Video Account DAU is expected to reach c.495.8mn in 2024E, with daily time spent increasing to c.60 minutes.

Fintech and Business Services (32.8% of 2022E revenue)

• FBS revenue growth slowed to 6.2% YoY in 2022E due to pandemic impact on commercial payments.
• Expected to rebound by 14.4% and 11.4% YoY in 2023E and 2024E, driven by recovery in payment volume and cloud business traction.
• Gross margin for FBS improved to 33.3% in 2Q22, with self-developed PaaS products like TDSQL contributing significantly.

Financial Forecasts

Sensitivity Analysis

• Revenue Sensitivity:

  • In 2022E, revenue could vary between -3.7% and +3.7% depending on ad and FBS growth.
  • In 2023E, revenue could vary between -3.4% and +3.4%.

• Non-IFRS Net Profit Sensitivity:

  • In 2022E, net profit could vary between +7.2% and -7.2% depending on opex control.
  • In 2023E, net profit could vary between +2.7% and -2.7%.

Catalysts

• Stronger than expected operating leverage.
• Accelerating monetization of Weixin Video Account.
• Macro recovery supporting rebound in ad, fintech, and enterprise services.

Strategic Adjustments

• Focus on quality growth in business services.
• Reduction of loss-making projects and prioritization of self-developed products.
• Optimization of operating expenses and improvement of operating efficiency.
• Continued investment in technology infrastructure and digital economy facilitation.