Tencent Reports a Turnaround in Earnings; Video Accounts Growing Rapidly; FVE Unchanged at HKD 741

We maintain our fair value estimate of HKD 741 for wide-moat Tencent after it reported earnings for the third quarter of 2022. Tencent delivered an above-expectation bottom line in a quarter marred by macroeconomic challenges. Revenue was down 2% year over year, but adjusted net profit grew 2%, marking a turnaround from four consecutive quarters of declines. While the firm’s cost reduction efforts were the main drivers behind the year-over-year growth in earnings, we see revenue opportunities in areas such as video accounts, international games, and enterprise software. We view Tencent shares as very undervalued, trading at a 60% discount to our fair value estimate. We believe the current market valuation of 13 times 2023 core earnings, as at Nov. 17, 2022, and the tepid reaction to these results indicate 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.