Tencent 2018 Summary
Core Content and Key Highlights
Tencent, a leading internet conglomerate in China, reported its 4Q17 earnings, which beat consensus by 4%, but revenue was slightly weaker than expected due to a sequential decline in the online game business. The company is focusing on future growth through increased investment and monetisation strategies in various areas.
Main Points
- Earnings and Revenue Performance: 4Q17 earnings beat expectations, while revenue was slightly below due to a QoQ decline in online games. The mobile game performance was weaker, but 1Q18 is expected to be stronger.
- Monetisation of WeChat: The monetisation of WeChat's traffic is a key growth driver, with significant potential in social advertising, social commerce, and mobile payments.
- Smart Retail Strategy: Tencent is launching a smart retail strategy to empower offline retailers with technology, including payments, cloud, data analytics, and AI. This could help capture market share from e-commerce competitors.
- Investment Strategy: The company is increasing investment in video content, mobile payment, cloud, AI, and smart retailing. While this may put short-term pressure on margins, it is seen as essential for long-term growth.
- Target Price and Valuation: The target price is maintained at HKD540, which implies a 17% upside from the current price. The valuation is based on SOP (Shareholder's Operating Profit) and reflects the company's market leadership and future growth potential.
- Key Risks: Regulatory risks in China's internet sector and competition in mobile payment and online video segments are noted as potential challenges.
Financial Overview
Forecasts and Valuations (CNYm)
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total turnover |
151,938 |
237,760 |
334,199 |
440,173 |
563,874 |
| Reported net profit |
41,095 |
71,510 |
75,731 |
104,017 |
132,924 |
| Recurring net profit |
45,420 |
65,126 |
88,102 |
118,485 |
150,812 |
| Recurring net profit growth (%) |
40.1 |
43.4 |
35.3 |
34.5 |
27.3 |
| Recurring EPS (CNY) |
4.8 |
6.8 |
9.2 |
12.4 |
15.8 |
| DPS (CNY) |
0.12 |
0.18 |
0.19 |
0.26 |
0.33 |
| Recurring P/E (x) |
78.0 |
54.6 |
40.4 |
30.0 |
23.6 |
| P/B (x) |
19.9 |
13.7 |
13.1 |
11.0 |
9.4 |
| P/CF (x) |
139 |
26 |
35 |
22 |
29 |
| Dividend Yield (%) |
0.0 |
0.0 |
0.1 |
0.1 |
0.1 |
| EV/EBITDA (x) |
2.36 |
(2.70) |
(4.25) |
(1.89) |
(0.73) |
| Return on average equity (%) |
27.4 |
32.7 |
28.5 |
35.1 |
37.8 |
| Net debt to equity (%) |
net cash |
net cash |
11.6 |
4.9 |
net cash |
| Our vs consensus EPS (adjusted) (%) |
- |
- |
2.5 |
5.2 |
5.3 |
Financial Summary (CNYm)
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Recurring EPS (CNY) |
4.8 |
6.8 |
9.2 |
12.4 |
15.8 |
| EPS (CNY) |
4.3 |
7.5 |
7.9 |
10.9 |
13.9 |
| DPS (CNY) |
0.12 |
0.18 |
0.19 |
0.26 |
0.33 |
| BVPS (CNY) |
18.7 |
27.3 |
28.4 |
33.8 |
39.9 |
| Weighted avg adjusted shares (m) |
9,494 |
9,536 |
9,536 |
9,536 |
9,536 |
Valuation Metrics
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Recurring P/E (x) |
78.0 |
54.6 |
40.4 |
30.0 |
23.6 |
| P/E (x) |
86.2 |
49.8 |
47.0 |
34.2 |
26.8 |
| P/B (x) |
19.9 |
13.7 |
13.1 |
11.0 |
9.4 |
| FCF Yield (%) |
0.5 |
3.6 |
2.7 |
4.5 |
3.4 |
| Dividend Yield (%) |
0.0 |
0.0 |
0.1 |
0.1 |
0.1 |
| EV/EBITDA (x) |
2.36 |
(2.70) |
(4.25) |
(1.89) |
(0.73) |
| EV/EBIT (x) |
2.88 |
(3.58) |
(5.21) |
(2.28) |
(0.88) |
Key Drivers of Growth
- Performance-based advertising on mobile: A major growth area with potential for significant revenue.
- Mobile games: Expected to improve in 1Q18, especially with the monetisation of PUBG and recovery of HoK.
- Further monetisation on sticky and growing user base: Especially through WeChat's ecosystem.
Key Risks
- Weaker-than-expected advertising demand: Due to economic conditions.
- Competition in online video and online games: Affects market share and revenue.
- Regulatory risks in China's internet sector: Including content controls.
Company Profile
Tencent operates in online games, social networks, advertising, and e-commerce, with a diverse portfolio including:
- QQ, Weixin, and WeChat for communications.
- Qzone for social networking.
- QQ game platform for online games.
- QQ.com and various mobile apps for information.
The company has also made strategic investments in e-commerce, online-to-offline, and online travel.
Share Performance
| Metric |
YTD |
1m |
3m |
6m |
12m |
| Absolute |
13.9 |
1.0 |
15.7 |
33.2 |
102.2 |
| Relative |
8.9 |
1.1 |
8.7 |
21.4 |
74.5 |
Share Data
| Metric |
Value |
| Avg Daily Turnover (HKD/USD) |
10,095m/1,290m |
| 52-wk Price low/high (HKD) |
223 - 475 |
| Free Float (%) |
50 |
| Shares outstanding (m) |
9,411 |
| Estimated Return |
17% |
| Shareholders (%) |
- |
| MIH China (Naspers) |
33.9 |
| Ma Huateng |
10.2 |
| Zhang Zhidong |
6.2 |
Financial Exhibits
Income Statement (CNYm)
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total turnover |
151,938 |
237,760 |
334,199 |
440,173 |
563,874 |
| Gross profit |
84,499 |
116,925 |
170,167 |
227,667 |
288,191 |
| EBITDA |
61,029 |
87,830 |
118,562 |
159,017 |
198,316 |
| Depreciation and amortisation |
(11,125) |
(21,608) |
(21,881) |
(27,147) |
(32,872) |
| Operating profit |
49,904 |
66,222 |
96,680 |
131,870 |
165,444 |
| Net interest |
664 |
1,032 |
(129) |
314 |
3,057 |
| Income from associates & JVs |
(2,522) |
821 |
(1,472) |
(1,590) |
(1,590) |
| Pre-tax profit |
51,640 |
88,215 |
95,139 |
130,674 |
166,990 |
| Taxation |
(10,193) |
(15,744) |
(19,028) |
(26,135) |
(33,398) |
| Minority interests |
(352) |
(961) |
(381) |
(523) |
(668) |
| Recurring net profit |
45,420 |
65,126 |
88,102 |
118,485 |
150,812 |
Cash Flow (CNYm)
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Change in working capital |
(37,028) |
25,531 |
(15,666) |
6,256 |
9,279 |
| Cash flow from operations |
25,480 |
135,538 |
101,508 |
164,077 |
124,865 |
| Capex |
(7,796) |
(8,069) |
(5,542) |
(2,300) |
(5,374) |
| Cash flow from investing activities |
(96,254) |
(141,304) |
(63,973) |
(68,487) |
(80,248) |
| Proceeds from issue of shares |
3,838 |
4,046 |
3,970 |
0 |
0 |
| Cash flow from financing activities |
58,697 |
25,637 |
(84,082) |
(78,597) |
(24,174) |
| Cash at beginning of period |
136,698 |
124,621 |
144,492 |
97,945 |
114,939 |
| Net change in cash |
(12,077) |
19,871 |
(46,547) |
16,994 |
20,443 |
| Ending balance cash |
124,621 |
144,492 |
97,945 |
114,939 |
135,382 |
Balance Sheet (CNYm)
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total cash and equivalents |
124,621 |
144,492 |
97,945 |
114,939 |
135,382 |
| Tangible fixed assets |
23,748 |
31,871 |
37,413 |
39,713 |
45,087 |
| Intangible assets |
36,467 |
40,266 |
41,238 |
40,603 |
38,170 |
| Total investments |
170,374 |
277,964 |
313,388 |
353,062 |
397,498 |
| Total other assets |
16,156 |
26,125 |
21,318 |
23,876 |
26,741 |
| Total assets |
395,899 |
554,672 |
527,415 |
590,242 |
663,141 |
| Short-term debt |
15,744 |
20,448 |
20,448 |
20,448 |
20,448 |
| Total long-term debt |
93,753 |
111,457 |
111,457 |
111,457 |
111,457 |
| Other liabilities |
7,511 |
6,016 |
3,948 |
4,337 |
4,460 |
| Total liabilities |
206,516 |
273,609 |
235,517 |
246,832 |
262,038 |
| Shareholders' equity |
177,760 |
260,044 |
270,879 |
322,390 |
380,083 |
| Minority interests |
11,623 |
21,019 |
21,019 |
21,019 |
21,019 |
| Total equity |
189,383 |
281,063 |
291,898 |
343,409 |
401,102 |
| Net debt |
(15,124) |
(12,587) |
33,960 |
16,966 |
(3,477) |
| Total liabilities & equity |
395,899 |
554,672 |
527,415 |
590,242 |
663,141 |
Key Metrics
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Revenue growth (%) |
47.7 |
56.5 |
40.6 |
31.7 |
28.1 |
| Recurrent EPS growth (%) |
39.2 |
42.8 |
35.3 |
34.5 |
27.3 |
| Gross margin (%) |
55.6 |
49.2 |
50.9 |
51.7 |
51.1 |
| Operating EBITDA margin (%) |
40.2 |
36.9 |
35.5 |
36.1 |
35.2 |
| Net profit margin (%) |
27.0 |
30.1 |
22.7 |
23.6 |
23.6 |
| Dividend payout ratio (%) |
13.9 |
12.0 |
12.0 |
12.0 |
12.0 |
| Capex/sales (%) |
5.1 |
3.4 |
1.7 |
0.5 |
1.0 |
| Interest cover (x) |
25.5 |
22.8 |
34.5 |
46.8 |
56.5 |
Peer Comparison
| Company |
Ticker |
Price (HKD) |
Mkt Cap (USDm) |
3-mth avg t/o (USDm) |
P/E Hist (x) |
P/E FY1 (x) |
P/E FY2 (x) |
EPS FY1 YoY% |
EPS FY2 YoY% |
3-Yr EPS Cagr (%) |
PEG (x) |
Div yld Hist (%) |
Div yld FY1 (%) |
P/BV FY1 (x) |
| Tencent |
700 HK |
383.00 |
466,075 |
835 |
65.9 |
46.3 |
34.9 |
42.5 |
32.5 |
34.6 |
1.0 |
0.2 |
0.3 |
15.2 |
| HSI |
- |
28,852 |
- |
- |
13.8 |
13.2 |
12.1 |
5.1 |
8.8 |
7.9 |
1.5 |
3.5 |
3.4 |
1.4 |
| CSI300 |
- |
4,074 |
- |
- |
16.8 |
15 |
- |
- |
- |
- |
- |
- |
- |
- |
Conclusion
Tencent is expected to maintain its growth trajectory through strategic investments and monetisation of its social platforms, particularly WeChat. Despite short-term challenges, the company's strong market position and diverse business segments support its valuation and growth potential. The target price of HKD540 reflects the analyst's confidence in its future performance. Key risks include regulatory and competitive pressures.
