Tencent Holdings Limited

Date: January 28, 2024.

Company’s Overview

Tencent Holdings Limited (TCTZF), an investment holding company, offers value-added services (VAS), online advertising, fintech, and business services in the People’s Republic of China and internationally.

It operates through VAS, Online Advertising, FinTech and Business Services, and Other segments.

The company’s consumers business provides communication and services, such as instant messaging and social network; digital content including online games, videos, live streaming, news, music, and literature; fintech services, which includes mobile payment, wealth management, loans, and securities trading; and various tools, such as network security management, browser, navigation, application management, email, etc.

Its enterprise business comprises marketing solutions, which offers digital tools including user insight, creative management, placement strategy, digital assets management, etc.; and cloud services, such as cloud computing, big data analytics, artificial intelligence, Internet of Things, security and other technologies for financial services, education, healthcare, retail, industry, transport, energy, and radio & television applications.

In addition, the company operates an innovation business, which includes artificial intelligence; and discovers and develops enterprise and next-generation technologies for food production, energy, and water management applications.

The Company’s revenue proportions for the most recent fiscal year are:

• Value-Added Services (VAS): This category includes Tencent’s online gaming, social media, and fintech businesses. Online gaming is the largest segment within VAS, accounting for 32.8% of total revenue. Social media and fintech are also significant contributors to VAS revenue, accounting for 17.7% and 2.9%, respectively.
• Online Advertising: This category includes Tencent’s advertising business on its various platforms, such as WeChat, QQ, and its mobile games. Online advertising is the second-largest segment of Tencent’s business, accounting for 32.9% of total revenue.
• Others: This category includes Tencent’s other businesses, such as cloud services, mobile payments, and strategic investments. Others account for the remaining 14.7% of Tencent’s total revenue.

Competition

The company has an estimated market share of 22.00%. This means that the company generates 22.00% of the total revenue in the Chinese internet market. The leader in such market is Alibaba Group (BABA) with 33%, followed by Baidu (BIDU) with 25%. Other competitors are JD.com (JD), Meituan (MPNGY) and NetEase (NTES).

Related Risks

Tencent Holdings Limited, faces a variety of risks that could impact its business and financial performance. These risks include:

• Regulatory Risk: Tencent operates in a heavily regulated industry, and changes in regulations could significantly impact its business. For example, the Chinese government has been tightening its grip on the internet in recent years, which could affect Tencent’s ability to collect user data and target advertising.
• Competition Risk: Tencent faces intense competition from other Chinese tech giants such as Alibaba Group (BABA) and ByteDance (BDNCE). These companies are constantly innovating and expanding their offerings, which could put pressure on Tencent’s market share.
• Economic Risk: Tencent’s business is closely tied to the Chinese economy. A slowdown in the Chinese economy could dampen consumer spending on Tencent’s products and services, which could hurt the company’s profitability.
• Currency Risk: Tencent’s revenue is primarily denominated in Chinese yuan (CNY), while its expenses are primarily denominated in U.S. dollars (USD). Fluctuations in the exchange rate between CNY and USD could negatively impact Tencent’s profitability.
• Technological Risk: The technological landscape is constantly evolving, and Tencent could face challenges if it is not able to keep up with the latest trends. For example, the rise of artificial intelligence and virtual reality could pose new threats to Tencent’s existing businesses.
• Cybersecurity Risk: Tencent is a major target for cyberattacks, and a successful attack could disrupt its operations and damage its reputation. The company has invested heavily in cybersecurity measures, but it is still vulnerable to attacks.

The company’s management has taken several steps to mitigate the risks it faces.

• Regulatory Risk: Tencent has been actively engaging with Chinese regulators to ensure that it is compliant with all applicable laws and regulations. The company has also been investing in building a strong compliance team.
• Competition Risk: Tencent is constantly innovating and expanding its offerings to stay ahead of the competition. The company is also investing in its brand and marketing efforts to attract and retain users.
• Economic Risk: Tencent is diversifying its business to reduce its reliance on the Chinese economy. The company is expanding into new markets and developing new products and services.
• Currency Risk: Tencent is hedging its currency exposure to protect itself from fluctuations in the exchange rate between CNY and USD. The company is also diversifying its revenue streams to reduce its reliance on CNY-denominated revenue.
• Technological Risk: Tencent is investing heavily in research and development to stay at the forefront of technological innovation. The company is also partnering with other companies to develop new technologies.
• Cybersecurity Risk: Tencent has invested heavily in cybersecurity measures to protect its systems and data from attacks. The company is also constantly monitoring its networks for threats and vulnerabilities.

Company’s Profitability

Revenues from 2020 to last quarter report:

• Tencent Holding revenue for the quarter ending June 30, 2022 was $20.266B, a 34.74% increase year-over-year.
• Tencent Holding revenue for the twelve months ending June 30, 2022 was $73.378B, a 34.41% increase year-over-year.
• Tencent Holding annual revenue for 2022 was $82.406B, a 5.08% decline from 2021.
• Tencent Holding annual revenue for 2021 was $86.818B, a 24.29% increase from 2020.
• Tencent Holding annual revenue for 2020 was $69.851B, a 27.95% increase from 2019.

Meanwhile the revenues from 2010 till 2022 are:

** The 2023 and 2024 figures are the revenues that the analysts expect.

Net income from 2020 to last quarter report:

• Tencent Holding net income for the quarter ending June 30, 2022 was $2.815B, a 6.92% decline year-over-year.
• Tencent Holding net income for the twelve months ending June 30, 2022 was $18.224B, a 34.97% increase year-over-year.
• Tencent Holding annual net income for 2022 was $27.973B, a 19.73% decline from 2021.
• Tencent Holding annual net income for 2021 was $34.847B, a 50.45% increase from 2020.
• Tencent Holding annual net income for 2020 was $23.162B, a 71.54% increase from 2019.

And from from 2010 till 2022 is:

** The 2023 and 2024 figures are the net income that the analysts expect.

There are several reasons why the net income of the company declined in 2022 and is expected to be low in 2023. Such are:

• Macroeconomic factors: The Chinese economy has been slowing down in recent years, which has dampened consumer spending on Tencent’s products and services. This has led to a decline in revenue from Tencent’s online gaming and social media businesses.
• Regulatory headwinds: The Chinese government has been tightening its grip on the internet in recent years, which has put pressure on Tencent’s ability to collect user data and target advertising. This has led to a decline in revenue from Tencent’s online advertising business.
• Increases in operating expenses: Tencent has been increasing its investments in research and development, cloud computing, and other areas. This has led to a rise in operating expenses, which has offset the growth in revenue from its core businesses.
• Supply chain disruptions: The COVID-19 pandemic has caused disruptions to the global supply chain, which has affected Tencent’s ability to manufacture and distribute its products and services. This has led to increased costs and lower profit margins.
• Increased competition: Tencent faces intense competition from other Chinese tech giants such as Alibaba Group (BABA) and ByteDance (BDNCE). These companies are constantly innovating and expanding their offerings, which is putting pressure on Tencent’s market share and profitability.

EPS from 2020 to last quarter report:

• Tencent Holding EPS for the quarter ending June 30, 2022 was $0.29, a 3.65% decline year-over-year.
• Tencent Holding EPS for the twelve months ending June 30, 2022 was $1.89, a 35.13% increase year-over-year.
• Tencent Holding 2022 annual EPS was $2.87, a 19.94% decline from 2021.
• Tencent Holding 2021 annual EPS was $3.59, a 49.96% increase from 2020.
• Tencent Holding 2020 annual EPS was $2.39, a 71.61% increase from 2019.

Management

Company’s management has announced several major initiatives and changes in recent months.

In 2022, Tencent announced several initiatives to reduce its reliance on the Chinese market and diversify its business. The company announced plans to expand into new markets, such as Southeast Asia and India, and to develop new products and services, such as cloud computing and artificial intelligence. Tencent also announced plans to invest in research and development, in order to stay at the forefront of technological innovation.

In 2023, Tencent announced several initiatives to strengthen its compliance with Chinese regulations. The company announced plans to invest in building a strong compliance team and to actively engage with Chinese regulators. Tencent also announced plans to strengthen its data security measures, in order to protect user data from unauthorised access.

In addition to these initiatives, Tencent has also made a number of smaller announcements in recent years. The company has announced plans to expand its esports business, to invest in blockchain technology, and to develop new forms of entertainment. Tencent has also announced plans to acquire new businesses, such as the mobile game developer Next Studios.

Shares outstanding

Tencent Holdings Limited has a share repurchase program. The company repurchased US$11.2 billion of its own shares in 2022 and has authorised another US$10 billion for 2023. The company’s share repurchase program is a way for it to return capital to shareholders.

Milestones

Assets VS Liabilities

Tencent Holdings Limited has a strong asset to liabilities ratio of more than 2. This means that the company has more than enough assets to cover its liabilities. This is a good sign for the company’s financial health, as it indicates that it is able to meet its obligations to its creditors. The company’s asset to liabilities ratio has been increasing in recent years, which suggests that it is becoming more financially sound.

Guidance

Tencent Holdings Limited has updated its guidance for the full year 2023. The company expects revenue to be between ¥2,248 billion and ¥2,308 billion, representing a year-on-year growth of between 12% and 16%. The company’s operating profit is expected to be between ¥470 billion and ¥510 billion, representing a year-on-year growth of between 8% and 14%. The company’s net profit attributable to equity holders is expected to be between ¥282 billion and ¥312 billion, representing a year-on-year growth of between 4% and 10%.

Lawsuits

Tencent Holdings Limited has been involved in a number of lawsuits in recent years. Here are some of the most notable cases:

• The National Development and Reform Commission (NDRC) fined Tencent 50 million yuan ($7.7 million) in 2020 for violating anti-monopoly regulations. The NDRC alleged that Tencent had abused its dominant position in the online games market by imposing unfair terms on app developers. Tencent denied the allegations but agreed to pay the fine.
• Tencent was also fined 18.3 billion yuan ($2.9 billion) in 2021 by the State Administration for Market Regulation (SAMR) for monopolistic practices in the online music market. The SAMR alleged that Tencent had abused its dominant position by squeezing out competitors and forcing app developers to use its music services. Tencent denied the allegations but agreed to pay the fine.
• In 2022, Tencent was sued by the China Consumer Protection Committee (CCPC) for misleading advertising. The CCPC alleged that Tencent had falsely advertised the benefits of its mobile game Honor of Kings, which is one of the most popular games in China. Tencent denied the allegations but agreed to pay a 50 million yuan fine.
• In 2023, Tencent was sued by a group of investors for allegedly manipulating the stock price of its subsidiary, Miniclip. The investors alleged that Tencent had artificially inflated Miniclip’s stock price in order to sell its own stake in the company at a profit. Tencent denied the allegations but agreed to pay a 9.6 billion yuan fine.

DCF Analysis

According to DCF analysis, TCTZF’s stock price is undervalued. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

According to the Wall Street Journal, Tencent Holdings Ltd. (TCTZF) is currently rated by 49 analysts as Buy and by 6 analysts as Overweight. Three analysts rated it as Hold and one analyst rated it as Sell 1. The consensus rating for TCTZF is Buy.

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Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

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