It's Time to Buy Tencent

Even after lowering our forecasts, we think  Tencent (TCEHY) is severely undervalued. The wide-moat Internet giant has the largest social networking platforms in China, Weixin/WeChat and QQ, and monetizes them through selling in-game items, virtual items, premium service subscriptions, online advertising, payments, financial products, and other products.

We now expect a 10-year compound annual growth rate of 20% for operating profit, compared with 29% previously, and a 10-year CAGR of 19% for revenue versus 29% previously. The other revenue segment, which is mainly composed of payment and cloud, has slowed faster than our expectations in recent quarters, leading to a 10-percentage-point reduction in our 10-year other revenue CAGR to 30%. As a result of a pause in games approval in China, we now assume year-over-year online gaming revenue growth to be 6% in 2018. We estimate there will be a rebound in online gaming revenue growth to 16% in both 2019 and 2020 as approval resumes in mid-2019.