We maintain our Outperform recommendation on Tencent post its decent 3Q24 results; Revenues remained resilient on a pick of its gaming/social networking segment; EBITDA margin was higher on a better revenue mix, monetization and cost efficiencies; cash flow notably improved and Total debt/EBITDA trended lower despite the increased shareholder rewards. We expect the company’s debt metrics to further improve in FY25. We continue viewing Tencent $ bonds as core holdings in China and Asia IG credits; we like its 30,31 for investors looking to add duration as it offers a 15-20 bp of spread pick up against US A Tech and China SOEs. We prefer Tencent over Baidu/JD, which are rated 1-3 notches lower but trade only marginally wider/tighter.

While Chinese regulators have adopted a more friendly stance towards tech companies, any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past.

Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.

US-China tension may escalate under the new Trump Administration, including additional chip sanctions, which may result in higher volatility. Failing to secure a stable supply of advanced AI chips and/(or) find domestic alternatives could weigh on the long-term AI development of Tencent against international peers.