Is now a good time to buy Tencent stock? Momentum in online gaming, advertising would suggest so

Louise Moon

Tencent Holdings, largely unknown outside China, is the world’s largest gaming company. And last year, for the first time since its listing in 2004, its stock recorded its biggest yearly crash. But its shares have been on the rise in 2019, and with half-year results due on Wednesday, is now the time for investors to buy in?

Founded in 1998, it has a market cap of about HK$3 trillion. It runs WeChat, China’s most popular messaging app, and has toes dipped in payment systems as well as advertising, among other sectors. It was reported recently that the Shenzhen-based company was in talks to acquire a 10 per cent stake in Universal Music Group – the label behind Lady Gaga, Ariana Grande and Bruce Springsteen – from French conglomerate Vivendi for US$3.36 billion.

Since its listing in Hong Kong, the company’s share price has risen steadily. In 2017, it surged by a dramatic 115.9 per cent and reached an all-time high of HK$476.6 in late January 2018.

During this period, it also became the first Chinese technology company to crack the US$500-billion threshold in terms of market value, in November 2017, and posted a 74 per cent rise in net profit to 71.5 billion yuan (US$10.9 billion).

But it took a battering last year and shed 23 per cent through to the end of December.

The stock has turned a corner this year and was up almost 8 per cent at the close on Friday, at HK$338.40. But it still sits 30 per cent below its highest price. And its 14-day relative strength index of 45 indicates it is underbought. A reading above 70 suggests a stock is overbought, and under 30, oversold.

Of 58 analysts polled by Bloomberg, 51 rated the stock as “buy” and seven said “hold”. They also set an average 12-month target price of HK$430.30 – a 27 per cent increase from Friday’s close.

According to analysts, Tencent was a good investment proposition not only because of continued momentum in its gaming business, but also because of the long-term growth prospects of its advertising business and its dominance in China’s internet space.

China nudges top tech firms to give new life to struggling state giants

Online gaming has traditionally accounted for the largest chunk of Tencent’s business. In 2018, it made up 33.3 per cent of its total revenue, up 6 per cent from 2017. But growth slowed in the fourth quarter, which was stagnant year on year, to 24.2 billion yuan.

For nine months last year, Beijing froze game approvals, harming new releases, and only resumed issuing licences in December 2018. After missing out on the first three rounds of new approvals, Tencent said one of its new releases in May, Peacekeeper Elite, exceeded 50 million daily active users in its first two months of release.

Gaming “is still growing despite the fact that last year there were some policy uncertainties, but this year the whole growth of momentum has resumed. It should be one of the key drivers”, said Tam Tsz-Wang, equity research analyst focused on telecoms and technology for brokerage firm DBS Vickers Securities.

Tencent leads Hong Kong’s ‘Kings of Employees’ in outsize CEO pay

Much of this is expected to be propped up by growth in mobile games, with a billion people in China using smartphones by the end of 2018.

According to a note by Bloomberg Intelligence, the second quarter of this year through June is expected to post strong growth in mobile games sales, driven by Honour of Kings, the continued strength of Perfect World and the launch of Peacekeeper’s Elite. The quarter will also have a lower base comparison from the same period last year, due to the halt in approvals.

Meanwhile, investment bank Goldman Sachs, in a note at the end of July, said it was maintaining its “buy” rating for Tencent stock ahead of its earnings announcement. Goldman also said it was expecting a recovery in Tencent’s mobile gaming revenue and growth of 23 per cent year on year in the second quarter.

Elsewhere, Chelsey Tam, equity analyst at investment research company Morningstar, who rates the stock as “buy”, said the e-sports segment was likely to play an integral role in Tencent’s expansion in the long term. The company already backs two of the world’s most watched e-sports tournaments, and is looking to organise more events in China this year.

Tencent games revenue to recover but ad growth sluggish, says Goldman

The segment will not be a large contributor to revenue in the near term, DBS’s Tam said, but “the whole industry of e-sports is what we are looking into, and Tencent is one of the largest game publishers in China”.

China’s gaming market is, however, slowing. By the end of this year, the US will replace it as the world’s largest gaming market for the first time since 2015, with an estimated US$36.9 billion in revenue, according to a report by consultancy Newzoo in June.

And what the market is really betting on is Tencent’s future in advertising.

The contribution from advertising currently lies lower than that from online gaming, making up about 18.6 per cent of Tencent’s revenue in 2018.

And although macro uncertainties over slowing economic growth present challenges for a boom in advertising in the short term, “for monetisation opportunities, first of all it is coming from advertising”, Morningstar’s Tam said.

Gaming firm Nexon fails to draw Tencent bid, scraps US$16 billion deal

“They have a lot of potential to increase the advertising inventory” through targeted marketing on WeChat moments and mini programs, she said.

Investment bank Jefferies, which this month restarted its coverage of Tencent, rated its stock as “buy” citing advertising market share gains as one of the reasons behind long-term growth.

Binnie Wong, head of internet research for Asia-Pacific at HSBC, too maintained a “buy” rating as of the end of July, upping her target price from HK$458 to HK$464.

She expected advertising to remain on track for the second quarter, due to stable pricing compared with fellow Chinese internet giant Baidu, and better “user-targeting capabilities”, according to a recent research note.

More from South China Morning Post:

This article Is now a good time to buy Tencent stock? Momentum in online gaming, advertising would suggest so first appeared on South China Morning Post

For the latest news from the South China Morning Post download our mobile app. Copyright 2019.