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Fundamental View
AS OF 15 Apr 2024We maintain our Outperform recommendation on Tencent post its resilient and largely in-line 4Q23 results. We expect the company’s balance sheet to remain rock solid despite higher shareholder rewards. We see small positive earnings catalysts on domestic games and online advertising over the next 12-24 months.
We view Tencent as attractive against A-rated Chinese tech peers and Asia A-rated quasi-sovereign, and we like longer-dated Tencent $ bonds (7-20Y) as a core holding for duration extension in Asia credits. In addition, Tencent belly and long-end provide decent spread pick up vs A-rated US tech.
Business Description
AS OF 15 Apr 2024- Founded in November 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has ventured into instant messaging, social networking, online payments, digital entertainment, and PC and smartphone gaming. Most recently, it has also forayed into high-tech areas such as artificial intelligence, and cloud computing.
- Tencent's leading Internet platforms in China include Weixin/WeChat (online messaging), QQ Instant Messenger (online messaging), Tencent Games (gaming), Tencent Video/Weixin Video Accounts (video platforms), WeChat Pay (payments), and Tencent Cloud. The combined monthly average users (MAU) of Weixin and Wechat reached 1.34 bn as of 31 Dec 2023.
- In 2023, 49% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 33% came from FinTech and Business Services (e.g. commercial payments and cloud), 17% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 2.9 tn as of 15 April 2024.
Risk & Catalysts
AS OF 15 Apr 2024While 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.
Key Metrics
AS OF 15 Apr 2024RMB bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 32.2% | 25.2% | 27.0% | 31.4% | 29.8% |
Net Debt to Book Cap | 7.3% | 4.0% | 6.0% | 8.5% | 1.0% |
Debt/Total Equity | 47.6% | 33.7% | 36.9% | 45.9% | 42.5% |
Debt/Total Assets | 24.4% | 19.7% | 20.1% | 22.8% | 23.5% |
Gross Leverage | 1.6x | 1.4x | 1.7x | 1.9x | 1.6x |
Net Leverage | 0.4x | 0.2x | 0.4x | 0.5x | 0.1x |
Interest Coverage | 19.2x | 24.8x | 24.7x | 19.0x | 19.9x |
EBITDA Margin | 39.2% | 38.3% | 34.9% | 34.3% | 38.9% |
CreditSights View
AS OF 21 Mar 2024We maintain our Outperform recommendation on Tencent post its resilient and largely in-line 4Q23 results. We expect the company’s balance sheet to remain rock solid despite higher shareholder rewards. We see small positive earnings catalysts on domestic games and online advertising over the next 12-24 months. We view Tencent as attractive against A-rated Chinese tech peers and Asia A-rated quasi-sovereign, and we like longer-dated Tencent $ bonds (>7Y) as a core holding for duration extension in Asia credits. In addition, Tencent belly and long-end provide decent spread pick up vs A-rated US tech.
Recommendation Reviewed: March 21, 2024
Recommendation Changed: August 18, 2022