Tencent (0700) Identifying Tencent's alpha amidst the beta trade

Summary of Tencent's Conference Call Company Overview - Company: Tencent (0700.HK) - Current Price: HK$438.80 (as of October 10, 2024) - Price Target: HK$520.00 (for December 2025) Key Industry Insights - Market Performance: Tencent's share price has underperformed compared to ecommerce peers like Alibaba (+2%), PDD (+5%), and JD (+8%) in the recent market rally, attributed to a macro recovery theme [1][9] - Revenue Composition: Approximately 50% of Tencent's revenue is derived from non-cyclical operations (digital entertainment), while 40% comes from cyclical operations (ads and fintech) [1][9] Core Financial Insights - Earnings Forecast: Tencent's online game revenue is expected to grow by 15% YoY in Q3 2024, up from 9% YoY in Q2 2024, and further accelerate to 27% YoY in Q4 2024 [1][9][25] - Revenue Estimates: Total revenue forecast for Q3 2024 is RMB166 billion, which is 1% below Bloomberg consensus. Adjusted EPS is estimated at RMB5.87, 3% above consensus [3][9] Game Performance Highlights - D&F Mobile: Estimated cash grossing of RMB6-8 billion in Q3 2024, representing about 20% of Tencent's domestic accounting revenue and 14% of total gaming revenue in Q2 2024 [2][14] - New Game Launches: - Delta Force, launched on September 26, has reached 25 million registered users within a week [2][15] - One Piece Mobile is anticipated to be a high-potential title based on Tencent's previous success with Naruto Mobile [2][15] Financial Metrics and Adjustments - Adjusted EPS Revisions: Adjusted EPS for 2024 is revised up by 3% to RMB23.08, and for 2025 by 6% to RMB26.97 [6][21] - Revenue Projections: - 2024E Revenue: RMB661.7 billion - 2025E Revenue: RMB744.9 billion [6][29] Risks and Considerations - Downside Risks: Include potential regulatory tightening for games, continued macroeconomic slowdown, and challenges in launching successful mobile game titles [27] - Upside Risks: Successful monetization of new game titles and a favorable macro environment supporting ad growth [27] Conclusion - Investment Thesis: Tencent's non-cyclical operations, particularly in gaming, are expected to deliver positive alpha, while cyclical operations may benefit from a consumption recovery. The price target of HK$520 is based on an 18x P/E ratio for 2025E, reflecting a conservative valuation approach [1][10][26]