Why Tencent Looks Attractive Today
Weak results pose no threat to the wide-moat firm's long-term outlook.
We remain positive on wide-moat-rated Tencent (TCEHY) for its long-term growth outlook, but near-term uncertainty has risen because of the lack of visibility over the launches of new gaming titles. However, we had already factored in slower growth in 2018 due to the delays in approval for game monetization, and our earnings forecast is 10% below market consensus. We think the delay merely pushes off growth to 2019, when we expect game approvals to resume. Hence, we make little change to our key assumptions, but lift our full-year net profit forecast to CNY 74.6 billion from CNY 66.6 billion, to factor in noncash items classified in other gains. However, we lower our fair estimate to HKD 590 per share from HKD 641, after taking into account an 8% depreciation in the Chinese yuan against the Hong Kong dollar. We think the recent share price weakness present an attractive buying opportunity, with the current price level not fully reflecting Tencent’s monetization opportunities, supported by the company’s strong network effect built on its massive user base and ecosystem.
Recent market jitters were driven by net revenue growth slowing to 30%--the slowest pace since third-quarter 2015--and a 2% year-over-year (23% quarter-on-quarter) decline in net profit. The slowdown reflects a lack of new game launches, which is leading to concern that the Chinese government is clamping down on gaming. While this is not confirmed, we would not be surprised to see no or slow approvals for 2019 because of an ongoing restructure of the administrations governing this space. While the approval process of new game titles remains cloudy in the near term, we think revenue could be less impeded going forward because Tencent has a pipeline of 15 games approved for launch, of which five are expected in the third quarter. Tencent has a chance to see its gaming revenue pick up.
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Jennifer Song does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.