Investment Rating - The report maintains a "Buy" rating for Tencent (700 HK) with a target price of HKD 500, implying a potential upside of +22% from the current price of HKD 409 4 [4][7] Core Views - The inclusion of Tencent in the US Department of Defense's 1260H list is seen as having limited fundamental impact on the company, as its core business is concentrated in China with low reliance on US technology and markets [7] - Short-term market sentiment may face pressure due to potential negative impacts on overseas cooperation and international business development, especially with rising geopolitical uncertainties [7] - Tencent is expected to actively address the situation, similar to its previous successful appeal against the WeChat ban in the US [7] - The company's leading position remains strong, with improving profitability, and the focus for 2025 will be on the progress of WeChat's e-commerce ecosystem as a new growth driver [7] Financial Analysis and Forecasts - Revenue is projected to grow from RMB 554 552 million in FY22 to RMB 758 304 million in FY26E, with a CAGR of 7 0% [3][8] - Adjusted net profit is expected to increase from RMB 115 649 million in FY22 to RMB 250 348 million in FY26E, with a CAGR of 17 0% [3][8] - The adjusted target P/E ratio is forecasted to decline from 20 1x in FY24E to 17 0x in FY26E [3][8] - Key profitability ratios such as gross margin, operating margin, and adjusted net margin are expected to improve steadily over the forecast period [8] Market Expectations and Scenarios - The report presents three scenarios for Tencent: - Base case target price: HKD 500 - Optimistic case target price: HKD 537 (20% probability) - Pessimistic case target price: HKD 320 (20% probability) [15][16] - The optimistic scenario assumes better-than-expected performance in gaming and advertising, while the pessimistic scenario assumes weaker gaming performance and video monetization [15][16] Industry Coverage - The report covers major internet companies in China and globally, including Alibaba, JD com, Pinduoduo, NetEase, Bilibili, Meituan, and Kuaishou, among others [18] - Most companies in the coverage universe have "Buy" ratings, reflecting the analyst's positive outlook on the internet sector [18]

Group 1 - Tencent is a dominant online games operator in China, indicating its strong market position in the gaming industry [1] - As the online game market matures, Tencent is expanding into other growth areas such as marketing services and FinTech markets, showcasing its diversification strategy [1]

Investment Rating - The report maintains a "Buy" rating for Tencent Holdings [5][3] - The target price is set at 496.8 HKD, representing a potential upside of 21.3% from the recent closing price of 409.4 HKD [5][3] Core Insights - Tencent was added to the U.S. Department of Defense's "Section 1260H List" on January 7, 2025, which targets companies with ties to the Chinese military [1][2] - Despite the listing, the report suggests that Tencent's core business will not be significantly impacted, and there is a strong possibility of being removed from the list in the future [2][3] - Tencent's business continues to progress well, with new product approvals and features being launched, indicating a positive outlook for shareholder returns in 2024 and 2025 [3] Summary by Sections Company Overview - Tencent was unexpectedly included in the "Section 1260H List," which is updated annually to identify companies linked to the Chinese military [9][10] - The inclusion has led to a significant drop in ADR prices, but Tencent has stated that this is a misunderstanding as they do not operate in the military sector [2][11] Financial Performance - Tencent's revenue is projected to grow from 660.4 billion RMB in 2024 to 802.1 billion RMB in 2025, with a gross margin improvement from 52.8% to 53.5% [15] - The net profit is expected to increase from 193.1 billion RMB in 2024 to 249.8 billion RMB in 2025, reflecting a strong growth trajectory [15] Shareholder Value - Tencent has completed a share buyback program amounting to 112 billion HKD, significantly reducing its total share count and enhancing shareholder value [12] - The company plans to evaluate further buyback opportunities based on market conditions after the completion of the current program [12]

Economic Conditions in China - The Caixin Manufacturing PMI fell from 51.5 in November to 50.5 in December, indicating a decline in manufacturing activity and staffing levels for the fourth consecutive month due to weakened overseas demand [2] - The Caixin Services PMI also showed a decline, with service providers cutting staffing levels for the first time since August, reflecting concerns about international trade and competition [2] Labor Market and Consumer Sentiment - Declining employment levels and muted consumer confidence are significant challenges for Beijing's efforts to stimulate the economy, with the youth unemployment rate at 16.1% in November 2024, well above the national rate of 5% [3] - Consumer confidence dropped near historical lows in Q3 2024, which may negatively impact private consumption and demand, necessitating policy measures targeting household income to boost confidence [4] US-China Relations and Economic Implications - Improving US-China relations could be crucial for China's economic recovery, potentially easing trade tensions and boosting private sector sentiment, which in turn may drive job creation and support consumer confidence [5] - The Biden administration's actions, including targeting Chinese companies, may complicate these relations, as companies on the Section 1260H List could face US sanctions, impacting their operations and market perception [6][7] Market Performance - The Hang Seng Index is down 3.74% year-to-date, while the CSI 300 and Shanghai Composite have declined by 4.30% and 4.62%, respectively, reflecting market concerns over the potential impact of a US-China trade war on China's economy [10]

Companies Added to Pentagon's Military-Linked List - Tencent Holdings Ltd was added to the US government list of military-linked companies, causing a 7% drop in its Hong Kong-listed shares [1] - Contemporary Amperex Technology (CATL) was also added to the list, resulting in a 3% decline in its Shanghai-listed shares [2] - Other companies on the list include 360 Security Technology, Huawei, and BGI Genomics [8] Impact of the Pentagon's List - The designation can hurt companies' international operations as potential partners assess new risks [3] - Being on the list may impact investment or factory construction in America, and companies working with blacklisted firms may be stopped from participating in federal projects or investing in key US industries [4] Company Responses - Tencent stated that its inclusion on the list is a mistake and that it is not a military company or supplier, with no impact on its business [5] - CATL also claimed that its inclusion on the list is a mistake but did not respond to a request for comment [5] Company Backgrounds - Tencent, cofounded by billionaire Pony Ma with a net worth of $42.5 billion, has been expanding overseas and has stakes in international companies like Spotify and Supercell [6] - CATL, founded by Robin Zeng with a fortune of $35.9 billion, has been working with Ford to build a battery factory in Michigan and is a key battery supplier to Tesla [7] Removal from the List - Companies on the Pentagon's list can try to get off it, as seen with Xiaomi in 2021, but other companies like DJI and Hesai Technology remain on the list [8]

Core Viewpoint - Tencent, a major Chinese internet company known for its super-app WeChat, is also a significant investor in U.S. tech firms, but has recently been designated a "Chinese military company" by the U.S. Department of Defense, which could impact its investment activities in the U.S. [1][2][4] Group 1: Tencent's Investments - Tencent has notable investments in U.S. tech companies and startups, including Reddit, Snap, and Epic Games, through its Tencent Exploration Team based in Palo Alto [1][4] - The company is a major shareholder in Reddit, although its stake has recently fallen below 10% as per an SEC filing from November 2024 [4] Group 2: U.S. Designation and Implications - The U.S. Department of Defense's designation of Tencent as a "Chinese military company" serves as a warning regarding companies involved in Chinese military-civil fusion efforts, with legal consequences limited to barring U.S. government contractors from doing business with Tencent starting in 2026 [2][4] - Tencent has strongly refuted the designation, claiming it is "clearly a mistake" and asserting that it is not a military company or supplier [3] - If Tencent cannot remove itself from the list, it may face challenges in securing investments from U.S. founders who may be hesitant to accept funds from a company linked to the Chinese military [4] Group 3: Broader Market Trends - The designation of Tencent reflects a broader trend of U.S.-China decoupling, which has made it increasingly difficult for Chinese venture capitalists to invest in U.S. companies [5] - There is a potential risk of further sanctions against Tencent from other U.S. government entities, such as the Treasury Department [5]

Core Viewpoint - Tencent's stock price has significantly declined following its designation as a Chinese military entity by the U.S. Department of Defense, raising concerns about potential trade and technology implications [1][2]. Group 1: Stock Performance - Tencent shares fell by 9.7% in response to the news, reflecting investor concerns about the company's future prospects [1]. - Citigroup has characterized the decline in Tencent's stock price as a potential buying opportunity, despite the company's growth slowing compared to pre-pandemic levels [6]. Group 2: Regulatory Context - The entity list, which includes companies backed by the Chinese military, was established under the Thornberry Authorization Act, following an executive order from late 2020 that restricts U.S. entities from investing in such companies [3]. - Tencent has publicly stated that it is not a military company and plans to work with the Department of Defense to rectify its listing, claiming the designation is a mistake [4]. Group 3: Broader Industry Implications - The situation highlights the increasing risks faced by Chinese tech companies amid rising U.S.-China tensions, particularly as the U.S. government imposes restrictions on technology exports and innovation in China [5].

Group 1 - The analyst maintained a Buy rating on Tencent Holdings with a price target of 542 Hong Kong dollars ($69.70 U.S. dollars) [1] - Tencent has demonstrated platform leadership through patience, balanced execution, and transformation mindsets, becoming an industry leader in multiple internet domains such as Tencent Video, Tencent Pay, and Tencent Games [2] - The company is focusing on critical resources and multi-strategies for exploring AI opportunities, leveraging its hypercomputing cluster and sophisticated data to narrow the gap with peers [2] Group 2 - Tencent Video is solidifying the company's leadership in online video entertainment by focusing on high-quality content creation and improving profitability through resource allocation and anti-pirating measures [3] - China Literature is identified as a key catalyst for monetizing intellectual properties (IPs) through various entertainment formats, which will help expand Tencent's reach overseas [4] - The company is confident in its revenue growth potential, driven by its unique WeChat ecosystem and diverse monetization levers across various sectors [5] Group 3 - Tencent is trading at 15 times 2025E P/E, with a consistent shareholder return policy, having surpassed its 2024 annual buyback target by repurchasing shares worth 112 billion Hong Kong dollars ($14.4 billion U.S. dollars) [6] - The stock is currently down 8.18% at $48.82 at the time of publication [6]

Core Viewpoint - Tencent Holdings has been actively repurchasing its shares, indicating a strategy to enhance shareholder value amidst market fluctuations. Group 1: Stock Performance - The stock closed at HKD 416.000, down 0.24% for the day, with a total trading volume of HKD 8.664 billion [1] - Over the period, the stock has accumulated a rise of 3.12% [2] Group 2: Share Buyback Details - On January 2, Tencent repurchased 1.68 million shares at prices ranging from HKD 413.800 to HKD 424.600, totaling HKD 700 million [3] - Since November 15, 2024, the company has conducted buybacks for 32 consecutive days, accumulating a total of 54.24 million shares and a total expenditure of HKD 22.147 billion [4] - Detailed buyback information is available from Data Treasure [5]

Company Repurchase Activities - Tencent Holdings repurchased 1 37 million shares with a total amount of HKD 574 million the highest repurchase price was HKD 421 4 and the lowest was HKD 416 the cumulative repurchase amount for the year reached HKD 112 003 billion [1][3] - AIA Group repurchased 1 1058 million shares with a total amount of HKD 62 4812 million the highest repurchase price was HKD 56 85 and the lowest was HKD 56 1 the cumulative repurchase amount for the year was HKD 32 324 billion [1] - Anta Sports repurchased 635 thousand shares with a total amount of HKD 49 7718 million the highest repurchase price was HKD 78 9 and the lowest was HKD 77 45 the cumulative repurchase amount for the year was HKD 1 276 billion [1] Market Overview - On December 31 55 Hong Kong listed companies conducted share repurchases totaling 31 1658 million shares with a combined amount of HKD 890 million [2] - Tencent Holdings had the highest repurchase amount on December 31 at HKD 574 million followed by AIA Group at HKD 62 4812 million and Anta Sports at HKD 49 7718 million [3] - In terms of the number of shares repurchased China Gas Holdings led with 3 9 million shares followed by Andre Juice with 2 7765 million shares and Anton Oilfield Services with 2 168 million shares [3]