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Fundamental View

AS OF 08 Dec 2022
  • We affirm our O/P recommendation on Tencent. We continue to view Tencent as attractive compared to other Single-A rated Chinese companies and US A-rated tech peers. We see value in extending duration to the belly of Tencent’s curve as it provides a good pickup against its short-end (<5Y).

  • Tencent’s near-term growth recovery may be volatile, but we expect its balance sheet to remain strong in the next 6-12 months. We expect near-term growth recovery to remain constrained by potential COVID-19 flareups, but we think that its growth has already bottomed in 2Q. We think Tencent’s margins will continue to improve, and its EBITDA generation will be supported by its effective cost control measures, an improving product mix, monetization of its in-feed ads and disciplined marketing expenditures.

Business Description

AS OF 08 Dec 2022
  • 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 QQ Instant Messenger (online messaging), Weixin/WeChat (online messaging), QQ Games (gaming), Qzone (social networking), and Tenpay (payments). The combined monthly average users (MAU) of Weixin and Wechat reached 1,309 mn in 3Q22.
  • In 3Q22, 52% 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), 15% from Online Advertising and 1% from Others.
  • Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 2.7 tn as of 8 December 2022.

Risk & Catalysts

AS OF 08 Dec 2022
  • Any regulatory clampdowns abroad and domestically (e.g. US SEC delisting, 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 08 Dec 2022
RMB bn LTM 2Q22 FY21 FY20 FY19 FY18
Debt to Book Cap 31.0% 27.0% 25.2% 32.2% 33.5%
Net Debt to Book Cap 7.3% 6.0% 4.0% 7.3% 3.5%
Debt/Total Equity 44.9% 36.9% 33.7% 47.6% 50.3%
Debt/Total Assets 24.7% 20.1% 19.7% 24.4% 24.8%
Gross Leverage 2.3x 1.9x 1.5x 1.7x 1.6x
Net Leverage 0.5x 0.4x 0.2x 0.4x 0.2x
Interest Coverage 17.9x 21.9x 22.9x 17.9x 22.5x
EBITDA Margin 28.1% 30.9% 35.4% 36.4% 35.3%
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CreditSights View

AS OF 08 Dec 2022

Tencent’s 3Q22 showed emerging signs of recovery and it maintained a strong credit profile. We affirm our Outperform recommendation on Tencent. Revenue ticked down marginally YoY, though we note that the pace of contraction has decelerated and was in line with our expectations. Tencent’s profitability continued to sequentially improve in 3Q22, thanks to its effective cost control measures. Tencent’s leverage metrics remained strong, and liquidity improved in 3Q22. In our view, Tencent’s near-term growth recovery may be volatile, but we expect its balance sheet to remain strong in the next 6-12 months. We view Tencent as attractive compared to other A-rated Chinese corporate peers and US A-rated tech peers. We like the belly of its curve for a spread pickup of 81 bp vs shorter-dated bonds.

Recommendation Reviewed: November 17, 2022

Recommendation Changed: August 18, 2022

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