Tencent (700.HK) is scheduled to unveil first quarter earnings after markets close on Thursday.
Nomura analyst Jialong Shi expects the Chinese online gaming and social media giant to surprise positively on the bottom line. Shi forecasts non-GAAP earnings growth of 48% year-on-year, which is 7% above the consensus analyst estimate. He expects revenues to grow 43% compared to a year ago, which is in line with the consensus estimate, but notes Tencent is more likely than not to surpass top line expectations on stronger mobile games revenues.
In early 2017, we had forecast Tencent’s mobile gaming revenue to grow 48% y-y/14% q-q to CNY12.2bn in 1Q17F. We think the actual mobile gaming revenue likely beat our forecasts by 6-10% driven by the stellar performance of its two blockbuster titles, Dragon Nest and Honor of King (HoK). We estimate HoK’s quarterly gross billing likely exceeded CNY7bn.
We believe Tencent’s PC blockbuster, League of Legends (LoL), has managed to remain resilient in revenue though its active players could have dropped slightly due to the cannibalization of HoK.
Alibaba (BABA) and JD.com (JD) aren’t the only ones to benefit from stronger online retail sales in China. Stronger online retail sales are also likely to boost pay-for-performance advertising revenues for Tencent, notes Shi.
We estimate a strong 83% y-y growth in P4P ads revenue to CNY4.6bn, largely driven by WeChat P4P (pay-for-performance) ads. We believe P4P ads segment was a bright spot in China’s ad market in 1Q driven, by ecommerce and service providers whose ad spends were fuelled in 1Q by particularly strong online retail sales. E-commerce and service providers generally favor P4P ads. According to the National Bureau of Statistics (NBS), growth in China’s online retail sales accelerated to 33% y-y in March 2017 (Fig. 5), from 26% y-y in December 2016. Tencent’s display ads likely continued to slow further from 11% y-y in 4Q16 to 8% y-y in 1Q17 due to shift in online video business model from ads to subscription.
Tencent shares have gained 37% this year, putting it just a smidgen behind Alibaba and well ahead of Baidu (BIDU). The stock trades at 36 times forward earnings, which is above its five-year average level of 30 times.
Shi has a buy rating on Tencent with an HKD260 a share target price, which is in line with the stock’s current level.
May 15, 2017 at 01:49PM
from Isabella Zhong
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