Analyst Note| Chelsey Tam |
We have raised Tencent’s fair value estimate by 16% to HKD 800 per share or USD 103 and think the shares are undervalued. The upgrade is due to us lowering our WACC to 8.4% from 9.8% as we upgrade its average systematic risk to equity (cyclicality) from average to below average, mitigated by the 7 percentage points lower fintech revenue five-year CAGR amid new regulatory measures. We conservatively assume the anti-trust fine by the government to be CNY 18 billion this year, this would reduce operating profit for this year by 12%. We think these changes are not significant enough to threaten its wide moat and stable moat trend, as Tencent’s network effect--the strongest moat source that tends to be self-reinforcing as per our methodology--remains strong with its Weixin user base of 1.2 billion.