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Tencent Holdings Ltd ADR TCEHY

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Morningstar’s Analysis

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Economic Moat


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Raising Tencent’s FVE by 16% on Lower WACC; Antitrust Risks Manageable; Buy

Chelsey Tam Senior Equity Analyst

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.

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Company Profile

Business Description

Tencent is a Chinese Internet giant with businesses and investments in a wide variety of Internet services and contents. Major services include communication and social networking (Weixin/Weixin and QQ), online PC and mobile games, content (news, videos, music, comics, and literature), utilities (email, app store, mobile security, and mobile browser), cloud services, and financial technology. Tenpay in Weixin/Weixin and QQ is a payment solution that enables closed-loop transactions in Tencent’s ecosystems and has been adopted by many third-party partners and offline merchants. Tencent has an aggregate monthly active user base of less than 600 million for QQ and over 1.2 billion for Weixin/Weixin.

No. 33 Haitian 2nd Road, Tencent Binhai Towers
Shenzhen, 518054, Cayman Islands
T +86 75586013388
Sector Communication Services
Industry Internet Content & Information
Most Recent Earnings Dec 31, 2020
Fiscal Year End Dec 31, 2021
Stock Type
Employees 85,858