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Fundamental View
AS OF 30 May 2023We affirm our Outperform recommendation on Tencent. We like Tencent’s 24,25 for total return investors given its relatively flat yield curve, and the belly part of its curve (29,30,31) for spread investors.
Tencent’s revenue growth in 1Q23 was ahead of our/market expectations thanks to a solid and broad-based recovery across its business segments, including domestic gaming, payment transactions, and online advertising. EBITDA margin was 5 ppt ahead of our expectation thanks to the recovering topline growth of its higher-margin businesses and continued cost optimization. We expect Tencent’s credit profile to improve in FY23 with continued recovery in advertising and gaming revenues, effective cost control measures, which result in improving EBITDA and free operating cash flow.
Business Description
AS OF 30 May 2023- 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 1.3 bn as of 31 March 2023.
- In 1Q23, 53% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 32% came from FinTech and Business Services (e.g. commercial payments and cloud), 14% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.0 tn as of 30 May 2023.
Risk & Catalysts
AS OF 30 May 2023Any 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. In addition, 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.
Tencent operates in a competitive market alongside other Chinese tech giants. Failure to continually innovate may result in loss of market share and profitability. Monetization of its social-network base may take time and heavy investment in payments, cloud, AI and retail businesses may weigh on margins.
The potential restructuring and spin-off of Tencent’s finance-related business into a financial holding company as ordered by the Chinese government could be a credit negative event depending on the final structural reorganization.
Key Metrics
AS OF 30 May 2023RMB bn | FY19 | FY20 | FY21 | FY22 | LTM 1Q23 |
---|---|---|---|---|---|
Debt to Book Cap | 32.2% | 25.2% | 27.0% | 31.4% | 30.1% |
Net Debt to Book Cap | 7.3% | 4.0% | 6.0% | 8.5% | 4.8% |
Debt/Total Equity | 47.6% | 33.7% | 36.9% | 45.9% | 43.0% |
Debt/Total Assets | 24.4% | 19.7% | 20.1% | 22.8% | 23.9% |
Gross Leverage | 1.7x | 1.5x | 1.9x | 2.2x | 2.0x |
Net Leverage | 0.4x | 0.2x | 0.4x | 0.6x | 0.3x |
Interest Coverage | 17.9x | 22.9x | 21.9x | 16.4x | 16.7x |
EBITDA Margin | 36.4% | 35.4% | 30.9% | 29.6% | 31.4% |
CreditSights View
AS OF 18 May 2023We affirm our Outperform recommendation on Tencent. We expect Tencent ‘s credit profile to improve in FY23 with continued recovery in advertising and gaming revenues, effective cost control measures, which result in improving EBITDA and free operating cash flow. Tencent’s revenue growth in 1Q23 was ahead of our/market expectations thanks to a solid and broad-based recovery across its business segments, including domestic gaming, payment transactions, and online advertising. EBITDA margin was 5 ppt ahead of our expectation thanks to the recovering topline growth of its higher-margin businesses and continued cost optimization. We like the short-end (24,25) of Tencent’s curve, given its relatively flat yield curve. For spread investors, we like the belly part of its curve (29,30,31).
Recommendation Reviewed: May 18, 2023
Recommendation Changed: August 18, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India

