20210816-招银国际-腾讯控股-00700.HK-Regulation_headwinds_yet_over_5页_804kb

Tencent (700 HK) - CMB International Securities Equity Research Summary

Core Content Overview

This report provides an equity research update on Tencent (700 HK), analyzing its financial performance, regulatory environment, and investment outlook. The key focus is on the company's performance in the second quarter of 2021, the impact of regulatory tightening, and the revised earnings and valuation expectations for the upcoming years.

Main Points

2Q21E Financial Performance

• Revenue and Adj. Net Profit: Expected to be in-line with forecasts, with a +18% YoY revenue growth and +8% YoY adjusted net profit growth.
• Segment Performance:
  • VAS: +11% YoY
  • Ads: +21% YoY
  • Others: +32% YoY
• Game Revenue: Expected to grow +8% YoY (down from +17% YoY in 1Q21), with mobile game growth at +12% YoY.
• Social Network Revenue: Expected to grow +15% YoY.
• Adj. EPS: Forecasted at RMB 3.41, -1% below consensus.
• Margin Trends:
  • Gross Margin: 43.9% (down from 46.3% in 1Q21)
  • Operating Margin: 29.9% (down from 34.5% in 1Q21)
  • Adj. Net Margin: 24.0% (down from 25.1% in 1Q21)

Regulatory Impact

• Regulation Headwinds: The market has already anticipated game revenue deceleration due to regulatory pressures.
• Teenage Gaming Regulation: Expected to have limited financial impact as anti-addiction measures were already in place, and teenagers only contributed 6% of Tencent's total domestic revenue in 4Q20.
• Taxation: Potential increase in effective tax rate from 10% to 15%, which may result in a 5-10% earnings drag.
• Anti-Trust Law: Uncertainty remains, but the financial impact is expected to be limited.

Earnings and Valuation

• Earnings Revisions:
  • Adjusted earnings for FY21-23E have been trimmed by 8-11% due to regulatory risks and potential tax increases.
  • Target Price (TP) has been revised from HK$753 to HK$640, implying a 31x FY22E P/E.
• Fundamental Price Floor: Estimated at HK$402, implying a 24x FY21E P/E.
• SOTP Valuation:
  • Total Valuation: HK$6,129 billion
  • Target Price: HK$640 per share
  • Implied FY22E P/E: 31x

Investment Outlook

• Rating: BUY (Maintain)
• Reasoning: Despite short-term regulatory concerns, the company's long-term growth outlook remains solid.
• Share Performance:
  • 1-month: -18.9%
  • 3-month: -25.7%
  • 6-month: -38.1%
  • 12-month: -30.8% (relative to the sector)

Shareholding Structure

• Naspers: 28.9%
• Ma Huateng: 7.4%
• Vanguard: 2.8%

Key Financial Highlights

Revenue Growth (YoY)

• FY19A: 20.7%
• FY20A: 27.8%
• FY21E: 20.7%
• FY22E: 21.4%
• FY23E: 20.2%

Net Income (RMB mn)

• FY19A: 94,351
• FY20A: 122,742
• FY21E: 131,209
• FY22E: 164,043
• FY23E: 197,142

Adj. EPS (RMB)

• FY19A: 9.7
• FY20A: 12.7
• FY21E: 13.7
• FY22E: 17.1
• FY23E: 20.5

P/E Ratio

• FY19A: 38.6
• FY20A: 29.6
• FY21E: 27.5
• FY22E: 22.0
• FY23E: 18.4

P/B Ratio

• FY19A: 8.3
• FY20A: 5.1
• FY21E: 4.5
• FY22E: 3.9
• FY23E: 3.4

ROE (%)

• FY19A: 23.9
• FY20A: 21.8
• FY21E: 17.4
• FY22E: 16.4
• FY23E: 17.7

Net Gearing

• All periods: Net Cash

Conclusion

Tencent is expected to deliver in-line results for 2Q21E, with a focus on VAS and ads growth compensating for a softer game segment. The market has already factored in the game deceleration, and the current price is seen as being near its fundamental price floor. Although regulatory tightening and tax changes may pose short-term risks, the company's long-term growth potential and earnings sustainability support a BUY rating. The revised target price of HK$640 reflects a more conservative outlook, but the long-term outlook remains positive.