Tencent Holdings (0700.HK)_ Our Thoughts on Reported News of Latest Section 1260H List

Summary of Tencent Holdings (0700.HK) Conference Call Company Overview - Company: Tencent Holdings (0700.HK) - Market Reaction: Tencent's share price fell by more than 7-8% during US market hours due to its inclusion in the Department of Defense (DoD) Section 1260H list, which is expected to be published on January 7, 2025 [1][4]. Core Points and Arguments - Market Panic: The market's reaction is viewed as panic-driven, and it is suggested that the inclusion in the list does not confirm the correctness of the decision [1]. - Response to DoD: Tencent is expected to work with the DoD to clarify any misunderstandings, similar to other companies that have been successfully removed from the list after providing valid explanations [1][3]. - Investment Outlook: Despite the near-term overhang on share price due to investor sensitivity, the overall growth outlook and business fundamentals for Tencent are considered intact. The sell-off is viewed as an enhanced buying opportunity [1][4]. Financial Metrics - Current Share Price: HK$409.40 as of January 6, 2025 [5]. - **Target Price**: HK$573.00, implying a potential return of 40.0% and a total expected return of 40.7% including a dividend yield of 0.8% [5]. Valuation Approach - SOTP Valuation: The target price is based on a Sum-of-the-Parts (SOTP) approach, with various segments valued as follows: - Online Games: Valued at HK$127 per share (22$148 per share (26% of target price) using a 25x P/E on estimated ads profit of Rmb50.1 billion for 2025. - Social Network: Valued at HK$149 per share (26$67 per share (12% of target price) using a 15x P/E on estimated profit of Rmb37.7 billion. - Cloud/Business Services: Valued at HK$29 per share (5$53 per share after applying a 30% discount to equity stakes [7]. Risks - Downside Risks: Potential risks that could prevent Tencent shares from reaching the target price include: - Faster-than-expected revenue slowdown in core PC games [8]. - Unsuccessful launches of new mobile games. - Decline in the ranking and momentum of "Honor of Kings". - Further slowdown in China's economy affecting advertising demand. - Changes in the regulatory environment [8]. Additional Insights - Successful Removals from Section 1260H: Examples of companies that were previously included in the Section 1260H list and later removed include Hesai Technology and IDG Capital Partners, indicating a possible path for Tencent [2]. - Tencent's Statement: Tencent's representative described the inclusion on the list as "clearly a mistake" and emphasized their commitment to resolving any misunderstandings with the DoD [3]. This summary encapsulates the key points from the conference call regarding Tencent Holdings, highlighting the company's current situation, market reactions, financial metrics, valuation, risks, and additional insights.