Analyst Note| Chelsey Tam |
We like wide-moat Tencent’s step up in investment in areas with strong competitive advantages, including cloud, business services, enterprise software, and high production value games targeting the global market. The trend for enterprises to digitalize, especially in light of COVID-19, and the proven business model of cloud in the West has established the need to invest in business services. It appears to us that Tencent’s short-form video strategy has improved with an internal restructuring to combine the long- and short-form video platforms. Its dedication to investment in sustainable social value would look favorable to the government and could bode well for environmental, social, and governance-focused, or ESG, investors, in our view. These investments should reduce margin but they are in line with the industry trend. Our fair value estimate is maintained at HKD 800 per share, as we have increased outer-year revenue growth in gaming and cloud to offset the margin pressure resulting from heavier investment. We assume five-year operating profit excluding interest income and other gains CAGR to rise at 15% versus 16% before, this compares to Visible Alpha’s consensus of five-year operating profit excluding interest income and other gains CAGR of 22% as of May 21. Five-year total/game revenue/business services revenue CAGR would be 15%, 9.3% and 30% respectively, versus 14%, 8.7%, and 23% previously.