Company Overview
Tencent Holdings Ltd is one of the largest comprehensive internet service providers. The company is a giant in the communication services sector with a market cap of HK\$3,742,159.7 million (US\$481,071.6 million). It is traded under the Bloomberg ticker 700 HK.
The major shareholders include Naspers (25.7%), Ma Huateng (7.7%), and Vanguard Group Inc (3.0%). With the share price standing at HK\$403.80, the target price has been set at HK\$570.00, representing an upside of 41.2%.
3Q24 Results
Tencent reported solid earnings for the third quarter of 2024, with revenue growing by 8% year-on-year to Rmb167.2 billion. This growth was in line with consensus estimates. The gross margin expanded by 4 percentage points year-on-year to 53.1%, aligning with forecasts. The non-IFRS operating profit rose by 18.6% year-on-year to Rmb61.3 billion, while the non-IFRS operating margin increased by 3.2 percentage points year-on-year to 36.6%. Non-IFRS diluted EPS surged by 36% year-on-year, beating consensus estimates by 10%.
Segment Performance
Online Games
The online games segment saw significant growth, with revenue increasing by 12.6% year-on-year to Rmb51.8 billion in 3Q24, driven by a 14% year-on-year rise in domestic games revenue. International games, which account for 28% of game revenue, grew by 9% year-on-year, fueled by strong momentum from PUBG Mobile and Brawl Stars. The domestic game revenue growth was bolstered by contributions from VALORANT, DnF Mobile, and evergreen titles like HoK and Peacekeeper Elite.
Marketing Services
Marketing services revenue grew by 17% year-on-year to Rmb30 billion, primarily driven by robust advertiser demand for Video Accounts, Mini Programs, and Weixin Search inventories. Additionally, contributions from Paris Olympics-related brand advertising played a significant role.
Fintech and Cloud
Revenue from the fintech and cloud segment grew by 2% year-on-year to Rmb53.1 billion. Fintech services revenue remained stable year-on-year, with payment services being affected by a subdued macro environment but offset by positive growth in wealth management services. Business services saw positive growth, supported by cloud services revenue and e-commerce technology service fees.
Social Networking
Social networking revenue increased by 4% year-on-year to Rmb30.9 billion, driven by growth in app-based game virtual item sales and music subscription revenues.
Financial Metrics and Projections
Tencent’s key financial metrics for the years 2022 to 2026 are outlined below:
- Net turnover is projected to grow from Rmb554,552 million in 2022 to Rmb765,088 million in 2026.
- EBITDA is expected to rise from Rmb188,554 million in 2022 to Rmb284,439 million in 2026.
- Operating profit is forecasted to increase from Rmb150,622 million in 2022 to Rmb269,618 million in 2026.
- Net profit is anticipated to grow significantly from Rmb103,159 million in 2022 to Rmb222,712 million in 2026.
Stock Impact and Future Outlook
The fintech and business services (FBS) segment’s revenue growth decelerated to 2% year-on-year in 3Q24. However, the business services delivered positive year-on-year growth, supported by cloud services revenue and e-commerce technology service fees.
Tencent’s game outlook for 2025 remains robust, with deferred revenue ramping up by 24% year-on-year to Rmb106.6 billion in 3Q24. The potential launch of HoK World and HoK Breaking Dawn in 2025 is expected to be a key catalyst.
AI will play a crucial role in fostering online ad revenue growth. Tencent released Tencent Hunyuan Turbo in 3Q24, an upgraded foundation model utilizing a heterogeneous Mixture-of-Experts (MoE) architecture. This model doubled training and inference efficiency while halving inference costs. The integration with Taobao, Tmall, and WeChat Pay is expected to drive online ad revenue growth in 2025.
Margin Expansion
Gross profit increased to Rmb88.8 billion, up 3.6% year-on-year, with the gross margin expanding by 3.6 percentage points to 53.1%. The value-added services (VAS) segment saw its gross margin grow by 2 percentage points year-on-year to 57.5%, driven by heightened revenues from both domestic and international games. Marketing services gross margin stood at 53%, up from 52.3% in 3Q23. The FBS gross margin rose by 7 percentage points year-on-year to 45.2%, attributed to improved cost efficiency in the cloud services business. Operating margin improved by 1 percentage point year-on-year to 36.6%.
Shareholder Returns
In 3Q24, Tencent repurchased a total of 94.9 million shares for an aggregate amount of HK\$35.9 billion (1% of market cap). The company is on track to repurchase over HK\$100 billion of shares in 2024, having repurchased HK\$88.2 billion in the first nine months of 2024.
Earnings Revision and Risks
The revenue estimates for 4Q24 and 2024 remain largely unchanged at 8% and 8.5% year-on-year growth, respectively. However, non-IFRS net profit forecasts for 4Q24 and 2024 have been raised by 6% and 2%, respectively, implying a 30% and 28% year-on-year growth and net margin of 32% and 31%.
Key risks include regulatory risks and slowing growth from game revenue.
Valuation and Recommendation
UOB Kay Hian maintains a BUY recommendation with an unchanged target price of HK\$570.00 based on the 2025F SOTP valuation. The target price implies a 22x 2025F PE, with the company currently trading at 15x 2025F PE, which is 1SD below its historical mean of 25.3x.
Share Price Catalysts
- Improving online advertising from Wechat video accounts
- Game license approvals
- Collaboration with various internet platform operators within Tencent’s WeChat ecosystem
Key Financials
| Year to 31 Dec (Rmbm) |
2023 |
2024F |
2025F |
2026F |
| Net turnover |
609,015.0 |
660,875.8 |
716,672.6 |
765,087.6 |
| EBITDA |
176,654.0 |
227,525.5 |
255,425.0 |
284,439.2 |
| Operating Profit |
163,633.0 |
213,904.5 |
241,204.0 |
269,618.2 |
| Net Profit (adj.) |
153,529.0 |
205,244.4 |
224,549.1 |
253,315.5 |
| EPS (Fen) |
1,597.6 |
2,168.8 |
2,378.7 |
2,690.1 |
Balance Sheet
| Year to 31 Dec (Rmbm) |
2023 |
2024F |
2025F |
2026F |
| Fixed Assets |
87,279.0 |
113,701.7 |
142,329.4 |
172,804.3 |
| Other LT Assets |
971,521.0 |
1,051,798.1 |
1,140,783.7 |
1,239,474.6 |
| Cash/ST Investment |
172,320.0 |
277,649.0 |
321,829.0 |
365,888.4 |
| Other Current Assets |
346,126.0 |
187,489.1 |
205,173.2 |
223,309.7 |
| Total Assets |
1,577,246.0 |
1,630,637.9 |
1,810,115.3 |
2,001,477.0 |
| ST Debt |
41,537.0 |
41,537.0 |
41,537.0 |
41,537.0 |
| Other Current Liabilities |
310,620.0 |
152,805.7 |
177,939.4 |
192,122.4 |
| LT Debt |
155,819.0 |
155,819.0 |
155,819.0 |
155,819.0 |
| Other LT Liabilities |
195,589.0 |
195,589.0 |
195,589.0 |
195,589.0 |
| Shareholders’ Equity |
808,591.0 |
1,019,797.2 |
1,174,140.9 |
1,351,319.6 |
| Minority Interest |
65,090.0 |
65,090.0 |
65,090.0 |
65,090.0 |
| Total Liabilities & Equity |
1,577,246.0 |
1,630,637.9 |
1,810,115.3 |
2,001,477.0 |
Cash Flow
| Year to 31 Dec (Rmbm) |
2023 |
2024F |
2025F |
2026F |
| Operating |
221,962.0 |
240,727.5 |
206,131.4 |
223,625.5 |
| Profit for the Year |
157,165.0 |
218,744.6 |
237,782.6 |
271,664.1 |
| Tax |
(43,276.0) |
(42,216.8) |
(41,900.4) |
(48,952.2) |
| Deprec. & Amort. |
13,021.0 |
13,621.0 |
14,221.0 |
14,821.0 |
| Associates |
(5,800.0) |
(17,923.0) |
(8,000.0) |
(12,000.0) |
| Working Capital Changes |
33,362.0 |
65,912.5 |
7,449.6 |
(3,953.4) |
| Non-cash Items |
0.0 |
0.0 |
0.0 |
0.0 |
| Other Operating Cashflows |
67,490.0 |
2,589.1 |
(3,421.5) |
2,045.9 |
| Investing |
(125,161.0) |
(120,320.8) |
(131,834.3) |
(143,986.8) |
| Capex (Growth) |
(7,524.0) |
(32,039.7) |
(34,744.7) |
(37,091.9) |
| Investment |
0.0 |
0.0 |
0.0 |
0.0 |
| Others |
(117,637.0) |
(88,281.1) |
(97,089.6) |
(106,894.9) |
| Financing |
(82,573.0) |
(15,077.8) |
(30,117.0) |
(35,579.3) |
| Dividend Payments |
(13,124.6
|
