Is Tencent Holdings Ltd Going To Dominate The World?

Listed on HKEX, Tencent Holdings Ltd (Tencent) is a leading digital enterprise in China where it is the nation’s market leader in social communication platforms, online gaming platforms, digital content, and mobile payment solutions. As at 8 March 2019, Tencent is worth HK$ 3.29 trillion in market capitalization and now is among the top 50 constituents of the Hang Seng Index.

In this article, I’ll highlight its fundamentals, latest financial results and evaluate its stock based on its current share price of HK$ 348.00. Thus, here are 10 main things to know about Tencent before you invest.

  1. Monetisation Strategy 1: Value-Added Services (VAS)
    Tencent earns fee-based revenues from provision of multiple VAS from its social networks and online games platforms. They include upgrading of membership status to enjoy premium services, monthly subscription for digital contents, and sales of virtual items from the main users of its networks such as WeiXin / WeChat, QQ, and hundreds of online games. Revenues from VAS has grown by CAGR of 33.9% from RMB 35.7 billion in 2012 to RMB 154.0 billion in 2017 and hence, is the largest source of sales to Tencent presently.

Source: Tencent’s Annual Reports

  1. Monetisation Strategy 2: Online Advertising
    Tencent earns online advertising revenue such as provision of banners, in-feed contents, video pre-roll contents, Qzone ads, Full Screen Video ads, Location based ads, and promotion coupon ads all across its social properties, app stores, browser, ad network, and media properties. Its revenues from this division has grown by CAGR of 64.3% from RMB 3.4 billion in 2012 to RMB 40.4 billion in 2017.

Source: Tencent’s Annual Reports

  1. Monetisation Strategy 3: Transactional-based Revenues
    Tencent earns revenues from provision of online payment services and cloud services namely TenPay, WeChat Pay, QQ Wallet and also Tencent Cloud. This division is the fastest growing segment for Tencent with the amount of sales had increased by CAGR of 164.3% from RMB 0.4 billion in 2012 to RMB 43.3 billion in 2017.

Source: Tencent’s Annual Reports

  1. Group Financial Results
    Overall, Tencent has achieved CAGR of 47.6% in its group revenue from RMB 7.2 billion in 2008 to RMB 237.8 billion in 2017. It is resulted from substantial sales growth from the 3 monetisation strategies as stated in Point 1 – 3. Its shareholders’ earnings increased by CAGR of 43.6% from RMB 2.8 billion in 2008 to RMB 72.5 billion in 2017. Its ROE figures had dipped marginally from 30+% levels in 2008 – 2012 to 20+% levels in its recent 5 years in 2013 – 2017. It is because its shareholders’ equity had grown much faster than its growth in earnings during the period.

Source: Tencent’s Annual Reports

Calculated from Figures Obtained from Tencent’s Annual Reports

  1. Cash Flow Management
    From 2008 to 2017, Tencent has generated a total of RMB 331.3 billion in operating cash flows and raised RMB 113.2 billion in long-term debt. Out of which, Tencent has spent:

    – RMB 50.5 billion on net capital expenditures (CAPEX).
    – RMB 23.7 billion on redeemable instruments of associates.
    – RMB 78.5 billion on associate companies.
    – RMB 7.9 billion on joint venture companies.
    – RMB 18.0 billion on dividend payments to its shareholders.

    Overall, Tencent has increased its cash balance from RMB 3.1 billion in 2008 to RMB 105.7 billion in 2017. Evidently, it is enterprise which has strong ability to generate positive cash flows, reinvest them for greater and higher profits in the future.

Source: Tencent’s Annual Reports

  1. Latest 12-Month Financial Results
    From Q4 2017 to Q3 2018, Tencent has made RMB 294.2 billion in sales and RMB 85.3 billion in shareholders’ earnings or RMB 9.04 in earnings per share (EPS). In HKD, Tencent’s latest 12-month EPS is HK$ 10.55. As at 30 September 2018, Tencent has non-current liabilities of RMB 156.1 billion and shareholders’ equity of RMB 314.4 billion. Hence, its gearing ratio is 49.6%. Its current ratio is 1.04 and it has a cash balance totalling RMB 105.4 billion.

    Figures in RMB Billion unless stated otherwise
PeriodQ4 2017Q1 2018Q2 2018Q3 2018Total
EPS (RMB)2.212.471.892.479.04

Source: Tencent’s Quarterly Reports

  1. P/E Ratio
    As at 8 March 2019, Tencent is trading at HK$ 348.00 per share. Hence, its current P/E Ratio is 32.99 based on its most recent 12-month EPS of HK$ 10.55, which is below its 10-Year Average of 37.25.

  1. PEG Ratio
    In Point 4, Tencent has achieved CAGR of 43.6% in earnings. Hence, its PEG Ratio is 0.757, calculated by dividing its current P/E Ratio of 32.99 with its CAGR of its earnings. It indicates Tencent is undervalued based on the PEG Ratio formula.

  2. P/B Ratio
    As at 30 September 2018, Tencent has reported shareholders’ equity of RMB 314.4 billion. Its net assets is RMB 33.27 (or HK$ 38.84) per share. Thus, its current P/B Ratio is 8.96, which is below its 10-Year Average of 12.08.

  1. Dividend Yields
    In 2017, Tencent has paid out HK$ 0.88 in dividends per share (DPS). As such, Tencent’s dividend yield is 0.25% per annum.

VIA’s Verdict

Tencent has delivered rapid growth in sales and profits for the last 10 years. As such, its share price has grown substantially, resulting in significant increase in its market capitalisation from HK$ 97.9 billion in 2008 to HK$ 3.29 trillion. This works out to be CAGR of 42.1%, which is in line with its earnings growth.

As at 30 September 2018, Tencent would derive income from its various social platforms as follows:

– WeiXin / Wechat: 1.082 billion monthly active users (MAU)

– QQ: 802.6 million MAU

In terms of valuation, Tencent is valued at P/E Ratio of 32.99, PEG Ratio of 0.76, P/B Ratio of 8.96 and pays a dividend yield of 0.25% per annum. So, would you be investing in Tencent today at HK$ 348.00 a share?

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