20171211-招商证券_香港_-腾讯控股-00700.HK-Spotify_strategic_alliance__Win-win_deal_for_both_parties_6页_1mb

Tencent (700 HK) Summary

Core Content

Tencent Music Entertainment Group (TME), a subsidiary of China Merchants Securities (HK) Co., Ltd., has entered into a strategic alliance with Spotify, a leading global music streaming service. This partnership involves both companies acquiring minority equity stakes in each other through cash transactions. The deal is aimed at enhancing TME's global exposure and leveraging Spotify's international presence in the music streaming market.

Main Points

• Strategic Alliance: TME and Spotify have formed a strategic alliance through equity investments, with TME acquiring a minority stake in Spotify and vice versa. The exact percentage of ownership was not disclosed, but it is likely to be less than 10%.

• TME Overview:

  • TME is the largest online music service provider in China, with 700 million monthly active users (MAU) through its platforms QQ Music, Kugou, and Kuwo.
  • It was valued at $10 billion in a recent financing round and is preparing for an IPO in 2018.
  • TME's paid user ratio is 2.43%, significantly lower than Spotify's 23.3%.

• Spotify Overview:

  • Spotify is a Swedish startup and the largest music streaming service provider globally, with a market share of 40% as of 1H17.
  • It serves over 140 million users, including 60 million paid users, across 61 countries.
  • Currently valued at $16 billion, with potential to reach $20 billion if it goes public in 2018.

• Alliance Benefits:

  • Enhances TME's global brand image and exposure.
  • Increases TME's bargaining power against major record companies like Warner, Rolling Stones, and Sony.
  • Provides TME with insights to improve its paid user ratio.
  • Helps TME better penetrate the global market through Spotify's presence in Europe and the Americas.

• Financial Outlook:

  • TME is expected to grow significantly in revenue and net profit over the next few years, with projected revenue reaching $396 billion in 2019.
  • The company is anticipated to maintain a strong growth trajectory, with revenue growth rates of 60.4% in 2016 and expected to reach 24% in 2019.
  • Non-GAAP net profit is projected to increase from $32.4 billion in FY15 to $109.9 billion in FY19.
  • The company is currently undervalued, with a target price of HK$500, representing a potential upside of 27% from the closing price of HK$394 on 8 December 2017.

• Valuation Metrics:

  • EV/EBITDA has decreased from 65.1 in FY15 to 22.1 in FY19.
  • P/E ratio has also decreased from 92.6 in FY15 to 31.5 in FY19.
  • ROE is expected to decrease slightly from 31% in FY17 to 25% in FY19.

• Investment Recommendations:

  • The analyst maintains a "BUY" rating for Tencent, citing its strong growth prospects and strategic benefits from the alliance.
  • The target price is HK$500, with a potential upside of 27% from the current price.

Key Financial Data

Revenue (RMB mn)

• FY15: 102,863
• FY16: 151,938
• FY17E: 238,872
• FY18E: 319,681
• FY19E: 396,232

Non-GAAP Net Profit (RMB mn)

• FY15: 32,410
• FY16: 45,420
• FY17E: 65,994
• FY18E: 88,749
• FY19E: 109,940

Non-GAAP Diluted EPS (RMB)

• FY15: 3.44
• FY16: 4.78
• FY17E: 6.92
• FY18E: 9.27
• FY19E: 11.44

Dividend Yield (%)

• FY15: 0.12
• FY16: 0.15
• FY17E: 0.25
• FY18E: 0.28
• FY19E: 0.34

Shareholding Structure

• Naspers LTD: 33.3%
• Ma Hua Teng: 8.7%
• Blackrock: 1.8%
• No. of shares outstanding (mn): 9,477
• Free float: 57.7%

Analyst and Regulatory Disclosures

• The analysts responsible for the report certify that their views accurately reflect their personal opinions and that they have no financial ties to the specific recommendations.
• The report is for informational purposes only and should not be construed as investment advice.
• The report is subject to regulatory requirements and is only for distribution to certain investors and jurisdictions, as outlined in the document.

Conclusion

Tencent's strategic alliance with Spotify is a significant step towards becoming a global pan-entertainment company. The partnership is expected to provide TME with enhanced global exposure, stronger bargaining power, and insights into increasing its paid user base. Financially, TME is on a strong growth trajectory with increasing revenue and profit margins, making it an attractive investment opportunity. The analyst recommends a "BUY" rating with a target price of HK$500.