The Worst Is Over, Tencent Is Well-Positioned for an Earnings Turnaround; Shares Very Undervalued

Wide-moat Tencent's second-quarter results reaffirm our view that recent headwinds are temporary, and the firm's earnings are set for a rapid bounceback. On the back of some initial cost initiatives, the firm delivered second-quarter results that beat consensus estimates. With several other efficiency tools in its arsenal, we believe Tencent will become a more profitable company in a postpandemic China. We maintain Tencent's fair value estimate at HKD 741 and view shares as very undervalued (60% discount to our fair value estimate as of Aug. 17). We believe that the market underestimates the longer-term revenue contribution from Video Accounts and the potential for more operating leverage as Tencent cements a more efficient cost structure.