Tencent Holdings_Solid fundamentals, with AI re-rating potential

Tencent Holdings Research Call Summary Company Overview - Company: Tencent Holdings - Industry: Internet Services - Market Cap: HK$4,123 billion / US$529 billion - Shares Outstanding: 9,328 million - Current Price: HK$442.00 (as of 13 February 2025) - 12-Month Price Target: HK$593.00 - 12-Month Rating: Buy Key Points 1. Financial Performance and Valuation - Tencent's share price has underperformed year-to-date, increasing by 6% compared to KWEB's 17% increase [1] - The company is trading at a valuation of 15x 2025E PE, which is considered attractive given low market expectations [1][4] - Projected revenues for 2025 are estimated at Rmb726,090 million, reflecting a 10.8% increase from 2024 [5] - Net earnings for 2025 are projected to be Rmb255,688 million, a 14.5% increase from 2024 [5] 2. Gaming Segment - Tencent's domestic gaming performance during the Chinese New Year (CNY) was better than expected, with double-digit year-over-year growth [2] - The company has captured all top 5 game grossings in China year-to-date, including titles like "Honor of Kings" and "PeaceKeeper Elite" [2][16] - There is a strong pipeline of games set to launch in China, including successful titles from overseas [2] - UBS estimates an upside potential to the Street's domestic game growth estimate of 8% for 2025, projecting 11% growth [2] 3. Mini Shops and AI Initiatives - Mini Shops have shown gradual growth in Gross Merchandise Value (GMV), reaching Rmb8 trillion in 2024, with positive feedback from merchants [3] - The monetization potential from commission fees and advertising revenue in Mini Shops is expected to be significant [3] - Tencent's AI capabilities are bolstered by its comprehensive dataset and user base, which may be underappreciated by the market [3] 4. Earnings Growth and Margin Expansion - Adjusted net profit margin (NPM) is expected to expand from 26% in 2023 to 34% in 2024, driven by gross profit margin (GPM) expansion [9] - Structural margin drivers include increased contributions from video accounts (VAs), live-streaming e-commerce, and optimization of game distribution channels [9] 5. Risks and Catalysts - Potential risks include ongoing concerns regarding China Military Companies (CMC) and macroeconomic uncertainties [1] - Catalysts for growth include updates on share buybacks, Mini Shop initiatives, and potential earnings upgrades amid strong game performance [4] - The risk-reward profile is considered attractive for the next six to twelve months [1] 6. Upside and Downside Scenarios - Upside Scenario (HK$680): Mid- to high-teens revenue growth and over 20% earnings growth in 2025, driven by improved monetization and macroeconomic recovery [21] - Base Scenario (HK$593): Revenue growth accelerates to low teens, supported by resilient game growth and advertising share gains [22] - Downside Scenario (HK$380): Revenue growth slows to single digits due to macroeconomic and regulatory challenges [23] 7. Additional Insights - Tencent's diversified portfolio includes gaming, social media, fintech, and cloud computing, positioning it well for future growth [14] - The company has a strong cash position, with cash and equivalents projected to reach Rmb475,927 million by 2025 [25] Conclusion Tencent Holdings presents a compelling investment opportunity with solid fundamentals, a strong gaming portfolio, and growth potential in e-commerce and AI. The current valuation appears attractive, and the company is well-positioned to leverage its ecosystem for future growth despite potential risks.