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Tencent Holdings Ltd ADR TCEHY

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Morningstar’s Analysis

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Fresh Takes on Three China Internet Stocks; Our Top Picks Are Tencent and NetEase

Ivan Su Senior Equity Analyst

Analyst Note

| Ivan Su |

We have taken a fresh look at wide-moat Tencent, narrow-moat NetEase, and no-moat CMGE, and our top picks are Tencent and NetEase. We believe the market has dramatically overreacted to recent regulatory risks while overlooking two firms' long-term revenue opportunities and margin upside. As we start to see signs of a stabilizing regulatory environment going into 2022, we have confidence that fears will subside as investors gradually understand headline risks do not represent fundamental game-changers to our long-term investment theses. Among the three names, NetEase and CMGE are pure gaming plays, while Tencent has about 40% of operating income exposure to games, with the rest coming from multiple other sources like advertising and fintech. On the game side, Tencent and NetEase are China's largest and second-largest publishers, respectively. Both companies own a vast number of well-known franchises that captivated multiple generations--Tencent is the owner of internationally renowned video game franchises like PUBG, Clash of Clans, League of Legends, Honor of Kings, and Fortnite (through Epic stake). At the same time, NetEase specializes in publishing Chinese domestic titles like Fantasy Westward Journey, Onmyoji, Identity V, and Naraka Bladepoint. We believe both firms will continue to capitalize on the success of existing franchisees while leveraging their capital and influence to develop next-generation titles.

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Company Profile

Business Description

Tencent is arguably the most influential Internet firm in China as one can hardly go by a day without using its products. Tencent is the world's largest video game vendor and owns the world's top-grossing mobile game--Honor of Kings. Tencent also runs China's largest social media super app--WeChat. The app is now part of the fabric of life for Chinese people who use it to chat, shop, watch videos, play games, order food and taxis, and more. Equally as impressive as its own portfolio, Tencent is also among the world's largest venture capital and investment corporations. The firm is now one of the largest shareholders in leading tech companies like Meituan, JD, DiDi, Snap, PDD, Kuaishou, Epic Games, and more.

No. 33 Haitian 2nd Road, Tencent Binhai Towers
Shenzhen, 518054, China, People's Republic of
T +86 75586013388
Sector Communication Services
Industry Internet Content & Information
Most Recent Earnings Sep 30, 2021
Fiscal Year End Dec 31, 2021
Stock Type
Employees 107,348