EQUITY REPORT 21.10.2021 – TENCENT

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TENCENT : ROAD TO LONG-TERM PROFITABILITY

Based in China, Tencent is an investment holding company specialized in valued added  internet services (VAS) and online advertising services. The company operates in 3 main segments:

  • VAS: mobile & online games (Tencent QQ games), internet & mobile apps
  • Fintech and Business Services (WeChat)
  • Online Advertising

Tencent reached over $74 Bn in sales in 2020, up by 42% driven by mobile games (sales up by 32% y/y) in China and internationally pushed by the popularity of its games gathering millions daily active users (DAUs) such as Peacekeeper Elite (over 50 DAUs), Call of Duty Mobile (over 150 M downloads worldwide), by generating sales through ads and a virtual goods purchasing services.

Its expansion in China and globally has been quite successful with several partnerships in several industries and thorough investments in popular gaming / gaming development, and e-commerce activities.

 

 

Once again, Q2-2021 was another best quarter for Tencent with revenue up 20% reaching over $21 Bn, solid results delivered with its online gaming business (net sales up 12% y/y) bolstered by the growth of smartphones games with an increase in DAUs and in average revenues per users. Especially, with its top Chinese titles “Moonlight Blade Mobile” and “Honor of Kings” which registered over 100 M DAUs, and as a comparison more active players than worldwide-know game League of Legends from Riot (100 M monthly active users).

In addition, its online advertising segment rose by 23% y/y with smart investments on its app, WeChat. With that, Tencent were able to provide attractive return on investment for its advertisers coupled with strong demand for education, e-commerce, and internet services.

Its fintech and business services segment grew also at a faster pace. by 40% thanks to its mobile payment service WeChat Pay, and wealth management activity.

With the large increase in DAUs over the years, which translates into stronger earnings, but in terms of cash it has remained volatile since 2017. Indeed, by building their business around key investments and companies acquisitions. In 2021 Tencent has already closed 51 games-related deals, claiming holdings (or full-ownership) in worldwide known game publishers as Ubisoft, Riot Games, Activision Blizzard

Still, some up and coming studios have riled up against Tencent, gaining market shares into the mobile business e.g. Chinese studio’s miHoYo with Genshin Impact, which brough over $1.5 Bn since its launch in September 2020 across all types of platforms

Its aggressive investment strategy since 2020 and the development of AAA games, make Tencent business strategy objective to maintain, grow and lead in the gaming industry. Tencent also pursue long-term investments in diverse business areas based on growing demand in terms of business software and cloud services. Infrastructure investments onto the next biggest trends covering blockchain, 5G, virtual reality, and data centers.

SHARE PRICE – This year, the stock lost 12%. The share price (20/10/2021) closed at $65.28 per share

The industry is overall always on the upside: progressing through next-gen innovation and new technologies advancements with a clear goal striving for the highest / faster performance and profit margin maximization.

Tencent will keep delivering strong results in the upcoming years, carried by its gaming business and its 1.25 Bn MAUs app WeChat, especially WeChat Pay its payment platform, a must-have app in China. With a rising cash, a strong establishment in Asia and the support of its government, the growth perspectives are tremendous, as Tencent will be a key player in shaping the future of the internet, for better and worse.

Average growth per year : 3%

 

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