20160519-法国巴黎银行-腾讯控股-00700.HK-Slower_outlook_for_ad_growth_12页_447kb

TENCENT 700 HK Summary

Core Content

Tencent, a leading Chinese internet company, reported its 1Q16 results, which were largely in line with the analyst's expectations but slightly above the BBG consensus. The company maintained its BUY rating and target price of HKD200, indicating continued confidence in its long-term growth potential.

Main Points

• Financial Performance:
  • Revenue reached RMB32.0b (+43% y-y), slightly above BNPPe estimates.
  • Operating profit was RMB13.4b (+43% y-y), also slightly above BNPPe.
  • Net profit was RMB9.2b (+33% y-y), but 7% below BNPPe due to a RMB1.1b share of associate loss from e-commerce investees.
• Gross Margin:
  • Gross margin was stable at 58.1%, while operating profit margin increased by 6.1ppt q-q to 41.9%.
• Segment Performance:
  • Online Games: Revenue of RMB17.09b, with strong mobile game growth (+16% q-q; +86% y-y), driven by successful new games like Cross Fire Mobile, Honor of Kings, and Naruto Mobile.
  • Social Networks: Revenue of RMB7.88b, showing strong sequential growth due to higher subscription revenues and virtual item sales.
  • Online Advertising: Revenue of RMB4.70b, which fell sequentially by 18% but grew year-over-year by 73%, attributed to weak seasonality and macroeconomic challenges.
• WeChat Growth:
  • WeChat MAU reached 762m in 1Q16, surpassing the forecast of 744m.
  • Tencent is building an eSports culture to retain users and extend game lifecycles.
• Investment Thesis:
  • Tencent's dominant traffic platforms (QQ IM on PC, WeChat on mobile) provide a strong competitive advantage.
  • The company has successfully replicated its PC business model to the mobile space, demonstrating strong monetization capabilities.
• Catalysts:
  • Continued growth in WeChat's revenue and user base.
  • New mobile games and monetization strategies are expected to boost confidence in Tencent's mobile platform strategy.
• Risks:
  • Potential slowdown in online game market growth.
  • Disappointment in monetization of mobile platform, including slower user growth or regulatory changes.
  • Weak execution on new businesses and investments.

Key Financials

Key Assumptions

Earnings Sensitivity

Segment Growth

• Online Games: RMB17.09b (+7% q-q; +28% y-y), with mobile games contributing significantly.
• Social Networks: RMB7.88b (+11% q-q; +48% y-y), driven by digital content subscriptions and virtual items.
• Online Advertising: RMB4.70b (-18% q-q; +73% y-y), affected by weak seasonality and macroeconomic challenges.
• E-commerce Transactions: No revenue reported, indicating no contribution in the quarter.
• Others: RMB2.33b, showing strong growth.

Market Outlook

• Ad Growth: Expected to slow due to weak seasonality and macroeconomic conditions, though long-term performance ads are still a focus.
• Mobile Game Growth: Continued strong performance with new game launches and monetization strategies.
• WeChat: Expected to dominate mobile user engagement and drive future monetization opportunities.

Conclusion

Tencent remains a top pick in the China Internet sector due to its strong fundamentals, dominant platforms, and strategic focus on mobile monetization. Despite a slowdown in ad growth, the company's performance in online games and social networks continues to be robust, supporting its BUY rating and target price of HKD200. The report highlights the importance of maintaining confidence in Tencent's mobile platform strategy and its ability to adapt to changing market conditions.