Date of Report: October 28, 2024
Broker: UOB Kay Hian Private Limited

Investor Sentiment and Market Outlook for Tencent

Investors are showing renewed optimism in Tencent, particularly in the context of China’s broader regulatory environment and economic policies. The sentiment shift aligns with an improving regulatory landscape and increasing consumer optimism. Tencent is viewed as one of the key mega-cap stocks expected to benefit from stabilized competition and favorable policy changes, which could positively impact its market valuation and growth trajectory.

Strategic Partnerships Enhancing Platform Capabilities

Tencent’s strategic collaborations reflect a shift towards a more collaborative environment within China’s internet sector. Notably, Tencent’s integration with Alibaba, including allowing WeChat Pay as a payment option on Alibaba’s platforms such as Tmall and Taobao, is a prominent example. This partnership underscores Tencent’s adaptability and willingness to work within China’s regulatory framework while expanding its user engagement across platforms.

Positive Prospects in the Gaming Sector

Tencent’s online gaming segment remains promising, with significant contributions expected from popular titles like “mDNF” (Mobile Dungeon & Fighter). Tencent’s gaming portfolio has shown strong growth in the Action/ARPG genre, with high revenue from recent blockbuster games such as Black Myth: Wu Kong and the continued success of Honor of Kings. Tencent’s gaming segment is considered countercyclical, potentially providing stable revenue streams regardless of broader economic conditions. With the projected launch of mDNF, Tencent anticipates RMB 15 billion in incremental grossing, representing an 11% contribution to its mobile gaming revenues in the first 12 months.

Advertising Revenue and Platform Engagement

Tencent’s advertising revenue continues to perform robustly, growing by 19% year-on-year, reaching RMB 29.9 billion in Q2 2024. This growth is largely attributed to increased ad demand for Tencent’s video accounts and long-form video content. The company’s ad performance is underpinned by a strong consumer base and Tencent’s high level of engagement through its digital ecosystems.

Valuation and Target Price

UOB Kay Hian has maintained a “BUY” recommendation for Tencent, setting a target price of HK$570.00. This valuation is based on a sum-of-the-parts (SOTP) approach and implies a 21.5x PE ratio for 2025, compared to Tencent’s historical average of 26x. Currently trading at a 14x 2025F PE, Tencent’s valuation appears attractive to investors, especially in the context of its consistent share repurchase program, which is projected to exceed HK$100 billion in 2024.

Sector Catalysts and Growth Potential

Several sector-wide catalysts are expected to benefit Tencent and other major internet players. Supportive government policies, increasing online retail penetration, technological advancements, and a commitment to AI content development are all projected to drive Tencent’s growth. The stabilization of the competitive landscape and favorable regulatory environment further reinforce Tencent’s market position and offer promising prospects for sustained revenue growth across its diverse segments.