Did you know that Tencent Holdings owns a stake in the developer behind 2024’s blockbuster game, Black Myth: Wukong? But the influence of this tech behemoth extends far beyond the gaming industry. What other businesses is Tencent involved in?
In this article, you will discover how Tencent generates revenue, its performance over the years, recent quarterly performance, forward guidance, and what might be a reasonable price for investing in Tencent.
Background on Tencent:
Founded on 11 November 1998 by Yi Dan Chen, Hua Teng Ma, Chen Ye Xu, Li Qing Zeng, and Zhi Dong Zhang, Tencent Holdings Ltd. is headquartered in Shenzhen, China. The company has grown to dominate the digital landscape in China through a broad array of services and innovations.
How does Tencent make money?
Tencent Holdings Ltd. has four primary revenue channels. It operates through the following segments: Value-Added Services, FinTech and Business Services, Online Advertising, and Others.
- The Value-Added Services segment is involved in online and mobile games, community value-added services, and applications across various Internet and mobile platforms.
- The FinTech and Business Services segment offers fintech and cloud services, which include commissions from payment, wealth management and other services.
- The Online Advertising segment refers to the display based and performance-based advertisements.
- The Others segment is composed of trademark licensing, software development services, software sales, and other services.
Source: Tencent 3Q24 Earnings Presentation
In every business area it operates, Tencent Holdings consistently holds one of the top two positions, underscoring its competitive edge as a leader across multiple sectors.
Profitability Insights
Source: Tencent 3Q24 Earnings Presentation
The image above shows the revenue by segments, with at least 50% of the revenue contributed by Fintech and Business Services, along with domestic games.
For clarity, it is worth noting that international games, domestic games, and social networks are categorised under the umbrella of Value-added Services revenue segment.
Revenue is on an uptrend, growing modestly, typical of a strong profitable company.
Source: Tencent 3Q24 Earnings Presentation
Source: Tencent 3Q24 Earnings Presentation
Gross profit has shown strong double-digit growth, indicating effective cost management by Tencent. Gross margin remains high and is increasing for various business segments. The fact that Fintech and Business Services is growing both in margin and contributes largely to the top line is a sign of Tencent being a quality business benefiting from economies of scale.
Source: Tencent 3Q24 Earnings
Above is the flow of its recent quarter performance:
Revenue: +8% Year on Year (YoY)
Gross profit: +16% YoY
Gross margin: +4% YoY
Operating profit: +20% YoY
Operating margin: +3% YoY
Net profit: +47% YoY
Net margin: +9% YoY
Source: Tencent 3Q24 Earnings Presentation
Capital expenditures (CAPEX) have increased by over 100%, driven by investment in GPU. These are essential to the establishment and improvement of Tencent’s artificial intelligence (AI) capabilities, a trend also observed among other large tech firms such as Meta, Microsoft, Amazon, and Google.
Tencent’s balance sheet also remains robust, with total cash exceeding its total debt. In terms of liquidity, it has positive free cash flow, with an increase of 14% year on year. In this quarter, they repurchased 95 million shares, signalling the strength of their cash position.
Outlook
Going forward, Tencent is optimistic about their growth and the broader economy.
“We believe, going forward, the economic recovery would take some time. But over the long run, we do believe it would definitely be reaccelerating because we felt there is a very strong resolution by the government to revive the economy. And at the same time, there’s actually positive structural factors in the economy including a very strong work ethics among workers in China, including a very deep engineering talent pool, including entrepreneurism among companies of all sizes, small, medium, and large companies….we believe we’ll be generating significant free cash flow next year that we can engage in dividend and share buyback.” said Martin Lau, President at Tencent
Source: Tencent 3Q24 Earnings Call Transcript
Share-Based Compensation
Source: Tencent’s investors page
Share-based compensation is designed to motivate employees as they strive for the company’s success. It is encouraging to see it being held at the CNY 6000 million level as Tencent continues to grow.
Employee Happiness
Source: Glassdoor
According to Glassdoor, Tencent’s employees are content, and happiness among workers often translates into higher motivation and productivity. These motivated employees are crucial in driving the company’s profitability.
Before we move onto valuation, below are the pros and cons of Tencent Holdings.
Key Advantages of Tencent’s Revenue Model:
1. Ecosystem Synergy:
- Tencent’s platforms (e.g., WeChat, QQ, and gaming) are interconnected, boosting user retention and cross-selling opportunities.
2. Recurring Revenue Streams:
- Subscriptions, in-app purchases, and advertising provide steady and predictable income.
3. Global Reach:
- Through strategic investments, Tencent earns revenue beyond China, particularly in gaming and technology.
4. Innovation and Scalability:
- Tencent frequently adopts emerging trends (e.g., AI, metaverse, cloud computing) to expand its revenue potential.
Challenges and Risks:
1. Regulatory Pressure:
- China’s government has tightened regulations on gaming and tech companies, which may limit Tencent’s growth in certain areas.
2. Competition:
- Tencent faces competition from domestic rivals like Alibaba, ByteDance, as well as international giants like Google, Amazon, and Microsoft.
3. Economic Slowdown:
- A slowdown in China’s economy could impact consumer spending on gaming, advertising, and FinTech services.
4. Blacklisted:
- The US added Tencent to their military blacklist, resulting in a decline. Geopolitics are usually sudden and unpredictable.
Valuation
Source: TradingView
Over the past 5 years, Tencent’s earnings growth has been approximately 6%. The green line (HKD$395) represents the intrinsic value based on estimated earnings. The advent of AI, the leadership Tencent has, and a positive outlook are factors that encourage market participants to take a bullish stance.
Notice that the price seldom drops to the intrinsic line. This is because market participants place a premium on well-run businesses.
Source: TradingView
Another valuation tool I use is assuming Tencent only grows 3% a year until perpetuity. Based on this valuation, Tencent’s intrinsic value is HKD$640. If we consider a 50% margin of safety, HKD$320 can be seen as an attractive price. Most people would wonder “HKD$640 is very different from HKD$395”, how should I approach this investment? This is a valid question because many tend to focus solely on valuation. The truth is valuation is only a small part of the analysis.
A thorough analysis of Tencent’s business dynamics, future prospects, and valuation suggests that a reasonable price range would be between HKD$320 and HKD$390.
Did you know that you can own HK shares in your own CDP account via HK SDRs? HK SDRs are financial instruments traded on SGX that represent beneficial interest in shares of Hong Kong-listed companies. Learn more here. Also, don’t miss out on our attractive promotion for our clients! Check it out below.
Zero Brokerage with Trading SDRs on POEMS
You can trade SDRs with zero brokerage from now till 31 March 2025. Learn more here.
Claim your S$50 and S$15 SDR vouchers now to maximize your trading opportunities.
Steps to Redeem your S$50 and S$15 SDR vouchers:
1) You will first need to log in to your POEMS 3 mobile App and go to the rewards section in your ‘Me’ tab.
2) Once you are in the Rewards Page, you will need to redeem the SDR voucher by utilising your POEMS coins
3) Swipe the “Buy with One Coin” button, then select the “Redeem” button, and buy any SDRs with S$500/S$5000 contract value
4) The vouchers can be redeemed upon a successful trade, of which any SDR with a minimum contract value of at least S$500 will be entitled to receive the S$15 cash credit and a minimum contract value of at least S$5000 will be entitled to receive the S$50 cash credit
5) Receive your cash credit in your trading account within ten days
For more information about our SDR promotion you can also visit the link here https://www.poems.com.sg/singapore-depository-receipts-promotion-zero_brokerage/
Reference:
- [1] https://static.www.tencent.com/uploads/2024/11/13/ccffd154b896b6c3e1ae65c13b73761d.pdf
- [2] https://www.fool.com/earnings/call-transcripts/2024/11/13/tencent-tcehy-q3-2024-earnings-call-transcript/
- [3] https://static.www.tencent.com/uploads/2024/11/13/3fba55fd8dcb38a2ff37e34895a5f8db.pdf
- [4] https://www.glassdoor.sg/Overview/Working-at-Tencent-EI_IE38281.11,18.htm
- [5] https://www.tradingview.com/
Disclaimer
These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products.
Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance.
Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries.
The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.
Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
CFD Disclaimer
Investments are subject to investment risks. The risk of loss in leveraged trading can be substantial. You may sustain losses in excess of your initial funds and may be called upon to deposit additional margin funds at short notice. If the required funds are not provided within the prescribed time, your positions may be liquidated. The resulting deficits in your account are subject to penalty charges. The value of investments denominated in foreign currencies may diminish or increase due to changes in the rates of exchange. You should also be aware of the commissions and finance costs involved in trading leveraged products. This product may not be suitable for clients whose investment objective is preservation of capital and/or whose risk tolerance is low. Clients are advised to understand the nature and risks involved in margin trading.
You may wish to obtain advice from a qualified financial adviser, pursuant to a separate engagement, before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a qualified financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest and we do not offer any advice in this regard unless mandated to do so by way of a separate engagement. You are advised to read the trading account Terms & Conditions and Risk Disclosure Statement (available online at https://www.poems.com.sg/) before trading in this product.
Any CFD offered is not approved or endorsed by the issuer or originator of the underlying securities and the issuer or originator is not privy to the CFD contract.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
This material is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products.
