China Information Technology 21 June 2016
Tencent Holdings (700 HK)
Target price: HKD205.00 (from HKD205.00) Share price (21 Jun): HKD172.90 | Up/downside: +18.5%
An emerging global game power house John Choi (852) 2773 8730 Supercell deal to solidify Tencent’s global mobile game leadership [email protected] Tencent will not consolidate Supercell’s results given its indirect holding Alex Liu (852) 2848 4976 Reaffirming our Buy (1) rating and TP of HKD205 [email protected]
What's new: Tencent announced today (June 21) that it has joined an Forecast revisions (%) investor consortium to acquire an 84% equity stake in Supercell from Year to 31 Dec 16E 17E 18E Softbank for USD8.6bn. We regard Supercell as one of the most renowned Revenue change - - - Net profit change - - - mobile game developers globally and see significant synergy from the deal, Core EPS (FD) change - - - as: 1) Tencent’s unrivalled game operation and distribution capability will Source: Daiwa forecasts likely boost Supercell’s existing game performance in China, and 2) Tencent could leverage on Supercell’s insight to expand its game offerings Share price performance to global markets. Post the deal, we see a solidified market leader position (HKD) (%) for Tencent in the mobile game industry globally. Tencent remains our top 180 150 pick for the sector. 165 135 150 120
135 105
What's the impact: Supercell deal: a closer look. Founded in 2010, 120 90 Supercell is currently one of the largest private global mobile game Jun-15 Sep-15 Dec-15 Mar-16 developers in terms of revenue, thanks to the success of its key game titles Tencent (LHS) Relative to HSI (RHS) such as Clash of Clan, Clash Royale and Boom Beach. Supercell reported EUR2.1bn of revenue and EUR693m of net profit in 2015, representing 37% 12-month range 125.00-176.60 and 63% YoY growth, respectively. The investment values Supercell at Market cap (USDbn) 207.19 USD10.2bn, implying a 12.8x 2015 PER, which looks cheap to us. Tencent 3m avg daily turnover (USDm) 369.70 Shares outstanding (m) 9,300 has disclosed that it will not consolidate the financial results of Supercell Major shareholder Naspers Limited (33.6%) after the deal is completed as it holds 50% ownership in the investor consortium (ie, c.42% indirect holding in Supercell). Further, the current Financial summary (CNY) Supercell management will also retain its operational independence after Year to 31 Dec 16E 17E 18E the investment. We believe Tencent’s USD16bn net cash balance is more Revenue (m) 142,022 177,042 209,259 than enough for the USD3-4bn cash consideration required for the deal. Operating profit (m) 56,962 69,570 82,711 Net profit (m) 46,109 56,402 68,489 Core EPS (fully-diluted) 4.907 6.002 7.288 Tencent’s 2Q16 mobile game momentum remains robust. After EPS change (%) 42.4 22.3 21.4 reaching an historical high of CNY8.2bn in mobile game revenue in 1Q16 Daiwa vs Cons. EPS (%) 19.0 13.2 10.7 PER (x) 29.9 24.4 20.1 (we forecast CNY8.3bn in mobile game revenue for Tencent in 2Q16), we Dividend yield (%) 0.4 0.6 0.7 see a solid performance from Tencent’s newly launched mobile games in DPS 0.655 0.833 1.013 2Q16 including Zheng Tu (征途, developed by Giant Game), JX Mobile (剑 PBR (x) 10.9 8.1 6.2 侠情缘, developed by Kingsoft), Naruto Mobile and WZRY (王者荣耀). In EV/EBITDA (x) 18.5 14.5 11.6 ROE (%) 37.7 38.5 35.4 our view, Tencent’s investment in Supercell would further enhance its: 1) Source: FactSet, Daiwa forecasts mind share among mobile gamers in China, and 2) mobile eSports user coverage globally, which would likely result in a higher gamer life cycle and retention overall.
What we recommend: We keep our 2016-18 earnings forecasts unchanged and reiterate our Buy (1) rating and unchanged 12-month TP of HKD205, based on a 35x PER applied to our 2016E non-GAAP EPS. Key risk to our call: higher-than-expected marketing and content expenses.
How we differ: We are more positive than the market on Tencent’s advertising potential, given its best-in-class login user coverage.
See important disclosures, including any required research certifications, beginning on page 5
Tencent Holdings (700 HK): 21 June 2016
Tencent: mobile game pipeline (as at June 2016) Tencent: PC game pipeline (as at June 2016) Game Title Launch Time Game Genre Developer Game Title Launch Game Genre Developer Testing Naruto Mobile (火影忍者) 1Q16 Action Licensed Time statues Timi Run Everyday 3D (天天酷跑 3D) 1Q16 Action In-house Advanced Casual Games (ACG) 使命召 Tian Tian Qiao Pai (天天桥牌) 1Q16 Card In-house Call of Duty Online ( 1Q15 High-end First-Person Licensed Open-beta 唤) Shooter (FPS) testing Tencent Wei Qi (腾讯围棋) 1Q16 Board & card In-house Orc Must Die (兽人必须死) 1Q15 3D Multiplayer Online Licensed Open-beta Tencent Qiao Pai (腾讯桥牌) 1Q16 Board & card In-house Battle Arena (MOBA) testing Blade & Soul Mobile (剑灵) 1Q16 Card Licensed SMITE (神之浩劫) 2Q16 3D MOBA Licensed Open-beta Tian Mo Huan Xiang (天魔幻想) 1Q16 RPG In-house testing Dragon Ball Z (龙珠激斗) 2Q16 RPG Licensed War Thunder (战争雷霆) 2Q16 Third-Person Shooter Licensed Open-beta Zheng Tu (征途) 2Q16 RPG Licensed (TPS) testing Jian Xia Qing Yuan (剑侠情缘) 2Q16 MMORPG Licensed Need for Speed (极品飞车) TBC Car chase action Licensed game Ensemble Stars (偶像梦幻祭) 2Q16 EDU Licensed Master x Master (全职大师) TBC 3D MOBA Licensed Carrot Fnatasy 3 (保卫萝卜 3) 2Q16 Tower Defense Licensed 炫斗之王 TBC 2D side-scrolling In-house Tian Tian Jun Qi (天天军棋) 2Q16E Board & Card In-house Core Fight ( ) fighting game Huan Le Pin San Zhang (欢乐拼三张) 2Q16E Board & card In-house Metro Conflict: Presto (重火 TBC Science fiction theme Licensed 无尽之剑命运 2Q16E RPG Licensed Infinity Blade Saga ( ) 力) FPS Yu Long Zai Tian (御龙在天) 2Q16E RPG In-house Three Kingdoms (霸三国 TBC Real Time Stratregy In-house Tian Tian Huan Ling (天天幻灵) 3Q16E Card In-house Online) Asura (全民斗战神) 3Q16E ARPG In-house HON (超神英雄) TBC 3D MOBA Licensed DnF Mobile (地下城与勇士) 2H16E Action Licensed Massively Multiplayer Online Games (MMOG) Infinity Blade Saga (无尽之剑 - 命运) TBC ARPG In-house Moonlight Blade (天涯明月 4Q15 3D martial arts style In-house Open-beta Puzzle and Dragon (智龙迷城) TBC RPG Licensed 刀) MMORPG testing 6L 3D (六龙争霸 3D) TBC Strategy Licensed Monster Hunter Online (怪物 4Q15 3D fighting Massively Licensed Open-beta FIFA Online Mobile (足球在线) TBC Strategy Licensed 猎人 OL) Multiplayer Online testing Xun Long Zhan Ji (驯龙战机) TBC Shooting Licensed Action Gams (MMOACT) Zhu Gong Ting Zhu (主公挺住) TBC RPG Licensed AtcheAge (上古世纪) 2Q16 3D fighting Massively Licensed Open-beta Stoneage (石器时代) TBC RPG Licensed
Multiplayer Online testing Role Play Game (MMORPG) Lost Saga (王牌对决) 2Q16 Arcade game style Licensed Closed- action MMOG beta testing Maplestory 2 (冒险岛 2) 2Q16 3D cartoon style Licensed Closed- MMORPG beta testing Path of Exile (流放之路) 2Q16E 3D Real time Licensed MMORPG Yu Long Zai Tian (御龙在天) 2Q16E 3D Real time Licensed MMORPG Kritika (疾风之刃) TBC 3D cartoon style Licensed fighting action Sura (天刹) TBC 3D next-generation Licensed high-end fighting MMOG MX (勇者大冒险) TBC ATM (Action, TPS, Licensed MMORPG) Iron Knight (刀锋铁骑) TBC 3D Action In-house Lost Ark (失落的方舟) TBC 3D MMORPG Licensed
Source: Company, compiled by Daiwa Source: Company, compiled Daiwa
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Tencent Holdings (700 HK): 21 June 2016
Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Monthly Active Users (MAU) of WeChat n.a. n.a. 355 500 697 810 851 876 (m) WeChat implied revenues (CNYbn) 0 0 3 16 33 58 80 101 Online game revenue (CNYbn) 15.8 22.8 32.0 44.8 56.6 70.9 81.7 90.2 Community value-added services 7.2 9.1 13.0 18.6 24.1 33.9 40.5 46.9 revenue (CNYbn)
Profit and loss (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Value-added services (VAS) 26,314 35,718 45,985 63,310 80,669 104,840 122,226 137,159 Online advertising 1,992 3,382 5,034 8,308 17,468 27,835 40,796 53,873 Other Revenue 190 4,793 9,418 7,314 4,726 9,347 14,020 18,227 Total Revenue 28,496 43,894 60,437 78,932 102,863 142,022 177,042 209,259 Other income 890 552 2,219 4,435 4,213 4,959 5,756 6,439 COGS (9,928) (18,207) (27,778) (30,873) (41,631) (58,528) (74,278) (87,368) SG&A (5,265) (8,146) (12,003) (16,736) (21,700) (23,521) (30,451) (36,411) Other op.expenses (1,939) (2,612) (3,590) (4,797) (6,629) (7,970) (8,498) (9,207) Operating profit 12,254 15,479 19,285 30,961 37,116 56,962 69,570 82,711 Net-interest inc./(exp.) 504 836 1,314 494 709 812 1,000 1,000 Assoc/forex/extraord./others (659) (1,264) (1,319) (2,023) (5,120) (6,292) (5,600) (4,800) Pre-tax profit 12,099 15,051 19,281 29,432 32,705 51,482 64,970 78,911 Tax (1,874) (2,266) (3,718) (5,125) (7,108) (10,483) (12,994) (15,782) Min. int./pref. div./others 22 53 61 79 173 350 300 300 Net profit (reported) 10,247 12,838 15,624 24,386 25,770 41,349 52,276 63,428 Net profit (adjusted) 10,940 14,286 17,063 24,224 32,374 46,109 56,402 68,489 EPS (reported)(CNY) 1.127 1.405 1.706 2.642 2.769 4.443 5.617 6.815 EPS (adjusted)(CNY) 1.203 1.563 1.863 2.624 3.478 4.954 6.060 7.359 EPS (adjusted fully-diluted)(CNY) 1.177 1.533 1.827 2.589 3.445 4.907 6.002 7.288 DPS (CNY) 0.150 0.200 0.240 0.360 0.435 0.655 0.833 1.013 EBIT 12,254 15,479 19,285 30,961 37,116 56,962 69,570 82,711 EBITDA 14,192 18,092 22,875 35,758 43,745 64,932 78,068 91,918
Cash flow (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax 12,099 15,051 19,281 29,432 32,705 51,482 64,970 78,911 Depreciation and amortisation 1,939 2,612 3,590 4,374 5,479 6,733 8,120 9,667 Tax paid (1,836) (2,225) (3,118) (4,481) (5,277) (12,261) (12,564) (15,260) Change in working capital 15,194 21,601 27,492 14,067 57,768 33,401 31,077 28,241 Other operational CF items (14,038) (17,610) (22,871) (10,272) (45,241) (3,767) (35) (1,352) Cash flow from operations 13,358 19,429 24,374 33,120 45,434 75,588 91,569 100,206 Capex (4,060) (3,970) (4,788) (6,033) (7,239) (8,108) (9,081) (10,171) Net (acquisitions)/disposals (6,875) (4,659) 8,059 (23,993) (55,841) (4,885) (5,178) (5,489) Other investing CF items (3,632) (6,772) (21,112) 100 76 76 76 76 Cash flow from investing (14,566) (15,401) (17,841) (29,926) (63,005) (12,917) (14,183) (15,584) Change in debt 2,917 (7,041) 1,334 19,252 17,539 19,143 16,257 16,383 Net share issues/(repurchases) (887) 218 (1,017) 0 0 0 0 0 Dividends paid (895) (1,225) (1,536) (3,323) (2,600) (4,048) (6,093) (7,746) Other financing CF items 3,238 5,662 2,927 8,825 3,589 (1,867) (1,960) (2,058) Cash flow from financing 4,373 (2,386) 1,708 24,754 18,528 13,228 8,205 6,579 Forex effect/others 4,770 (2,424) 1,507 4,899 0 0 0 0 Change in cash 7,935 (782) 9,748 32,846 957 75,900 85,590 91,202 Free cash flow 9,298 15,460 19,586 27,087 38,194 67,480 82,487 90,035 Source: FactSet, Daiwa forecasts
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Tencent Holdings (700 HK): 21 June 2016
Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment 31,271 29,709 43,982 62,685 135,500 166,741 253,690 346,349 Inventory 0 568 1,384 244 222 260 270 270 Accounts receivable 2,021 2,354 2,955 4,588 7,061 9,749 12,153 14,364 Other current assets 2,212 3,878 5,365 7,804 12,595 17,390 21,678 25,623 Total current assets 35,503 36,509 53,686 75,321 155,378 194,139 287,791 386,606 Fixed assets 5,885 7,899 10,734 11,748 15,879 18,557 20,910 22,897 Goodwill & intangibles 3,780 4,719 4,103 9,304 13,439 12,661 11,793 10,834 Other non-current assets 11,636 26,128 38,712 74,795 128,028 141,897 145,452 148,222 Total assets 56,804 75,256 107,235 171,168 312,724 367,255 465,945 568,559 Short-term debt 8,020 1,077 2,589 3,215 11,429 12,572 13,829 15,212 Accounts payable 2,244 4,212 6,680 8,683 15,700 20,202 25,410 29,844 Other current liabilities 10,919 15,376 23,998 38,137 97,277 133,407 165,978 195,941 Total current liabilities 21,183 20,665 33,267 50,035 124,406 166,181 205,217 240,998 Long-term debt 3,733 7,517 9,141 25,028 37,092 55,092 70,092 85,092 Other non-current liabilities 2,799 4,926 6,364 13,979 23,220 19,138 20,568 21,090 Total liabilities 27,716 33,108 48,772 89,042 184,718 240,411 295,877 347,179 Share capital 0 0 0 0 0 0 0 0 Reserves/R.E./others 28,464 41,297 57,945 80,013 120,035 124,844 168,068 219,380 Shareholders' equity 28,464 41,298 57,945 80,013 120,035 124,844 168,068 219,380 Minority interests 625 851 518 2,111 7,971 2,000 2,000 2,000 Total equity & liabilities 56,804 75,256 107,235 171,166 312,724 367,255 465,945 568,559 EV 1,339,907 1,335,590 1,318,856 1,276,412 1,217,247 1,202,250 1,134,938 1,062,379 Net debt/(cash) (19,517) (21,115) (32,252) (34,442) (86,979) (99,077) (169,769) (246,045) BVPS (CNY) 3.094 4.457 6.224 8.668 12.907 13.424 18.072 23.589
Key ratios (%) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) 45.0 54.0 37.7 30.6 30.3 38.1 24.7 18.2 EBITDA (YoY) 33.7 27.5 26.4 56.3 22.3 48.4 20.2 17.7 Operating profit (YoY) 24.6 26.3 24.6 60.5 19.9 53.5 22.1 18.9 Net profit (YoY) 27.6 30.6 19.4 42.0 33.6 42.4 22.3 21.4 Core EPS (fully-diluted) (YoY) 27.8 30.3 19.1 41.7 33.1 42.4 22.3 21.4 Gross-profit margin 65.2 58.5 54.0 60.9 59.5 58.8 58.0 58.2 EBITDA margin 49.8 41.2 37.8 45.3 42.5 45.7 44.1 43.9 Operating-profit margin 43.0 35.3 31.9 39.2 36.1 40.1 39.3 39.5 Net profit margin 38.4 32.5 28.2 30.7 31.5 32.5 31.9 32.7 ROAE 43.6 41.0 34.4 35.1 32.4 37.7 38.5 35.4 ROAA 23.6 21.6 18.7 17.4 13.4 13.6 13.5 13.2 ROCE 36.0 33.8 31.9 34.3 25.9 30.7 31.0 28.7 ROIC 142.1 85.9 65.9 69.2 65.5 131.9 396.6 (543.1) Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 15.5 15.1 19.3 17.4 21.7 20.4 20.0 20.0 Accounts receivable (days) 23.9 18.2 16.0 17.4 20.7 21.6 22.6 23.1 Current ratio (x) 1.7 1.8 1.6 1.5 1.2 1.2 1.4 1.6 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 13.3 14.2 14.1 13.6 15.7 14.7 14.8 14.9 Free cash flow yield 0.7 1.1 1.4 2.0 2.8 5.0 6.1 6.6 Source: FactSet, Daiwa forecasts
Company profile
Tencent is the largest and most used Internet service portal in China. Over the past decade, the company has been able to maintain steady earnings growth under its user-oriented strategy. On 16 June 2004, it was listed on the main board of the Hong Kong Stock Exchange.
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Tencent Holdings (700 HK): 21 June 2016
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Tencent Holdings (700 HK): 21 June 2016
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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.
Disclosure of investment ratings Rating Percentage of total Buy* 66.9% Hold** 19.7% Sell*** 13.5% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.
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If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
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