We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet.

We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.

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.