As Tencent Reignites Growth Engines, Rapid Recovery in Sight

We maintain our HKD 704 fair value estimate of wide-moat Tencent 00700 following its earnings report for the fourth quarter of 2022. While the results were in line with Refinitiv consensus expectations, management’s comments during the earnings call suggest the firm is now pivoting from cost-cutting to fostering growth. With Tencent reigniting growth engines, we fine-tune our near-term forecasts for the firm but keep longer-term assumptions unchanged. We continue to view Tencent shares as undervalued, trading at a 50% discount to our fair value estimate. We believe that the market underestimates the longer-term revenue contribution from video accounts and the potential for margin expansion as Tencent cements a more efficient cost structure.

The key highlight of these results was the 15% year-over-year growth in advertising revenue, despite operating under tough macroeconomic conditions in the fourth quarter of 2022. Even if we were to exclude the contribution of video accounts, ad revenue still grew close to 10%, above industry peers. Management attributed solid advertising revenue growth to better monetization (increased ad load) and improved ad targeting accuracy (enabled by machine learning). We believe the rapid monetization of video accounts will serve as the primary engine for ad revenue growth over the next few quarters. In the fourth quarter, user time spent on video accounts reached 1.2 times that of Moments, but its advertising revenue was less than 20% of Moments’, by our estimates. Having received “very positive” advertiser feedback, Tencent will display more ads in short videos, as well as build live streaming e-commerce in video accounts to nurture a new long-term revenue stream. With these initiatives, we expect revenue generated by video accounts to triple over the next few quarters (from CNY 1 billion in the fourth quarter of 2022 to CNY 4.9 billion in the fourth quarter of 2023).