strategicsns

BOCIresearchisavailableelectronicallyonBloomberg(BOCR),thomsonreuters.
comandwww.
bociresearch.
com.
CompanyUpdate9May2011-13%sideSELLTargetPrice:HK$185.
0Prior:SELLPriorTP:HK$185.
0700HKPrice:HK$211.
6TPBasis:28xP/Ebasedon2011ESectorRating:NEUTRALWhereareweDifferentOurfull-yearEPSestimateiscloseto9%belowconsensuswith1QNP4%lowerandrevenue3%lower.
KeyHighlightsofthisReport1Q11ErevenueYoYgrowthof35%.
1Q11EnetprofitYoYgrowthof29%.
KeyCatalysts/Events1Q11results–11May.
TradingSummaryP-TencentHoldings(700HK)110130150170190210230250721021121221328292142PriceCloseRelativetoHSCEI(RHS)Source:Bloomberg.
10203040May-10Jul-10Sep-10Nov-10Jan-11Mar-11May-11VolthYTD1M3M12MAbsolute(%)25.
33.
31.
536.
4RelativetoHSCEI(%)24.
19.
20.
424.
2Sharesoutstanding1,817Freefloat48.
0%Marketcap.
(HK$m)388,724Dailyturnover(3Mavg.
)HK$1,213mNetdebt/EquityNetcashMajorshareholderNaspers35%TencentHoldings1Q11resultspreviewWeexpectTencent's1Q11toplinetoreachRMB5.
709bn(up35%YoY)andtocontribute22%ofourfull-yearestimate.
Whileourrevenueforecastis3%lowerthanconsensus,weexpectthe1Q11bottomlinetocomeinatRMB2.
292bnon29%YoYgrowth,whichis4%lowerthanconsensus.
1Q11ResultsPreviewInternetvalue-addedservices:Onlinegamingrevenueisexpectedtogrow48%YoYandcommunityVAS22%YoY.
ThegrowthstemsfromtheincreaseinpayingsubscribersandtheimprovedARPU.
Mobileandtelecommunicationsvalue-addedservices:MVASisexpectedtopostyear-on-yeargrowthof26%,whichisbasedontheassumptionofpositivepayingsubscriberadditionsandARPU.
Onlineadvertising:20%YoYrevenuegrowthforthequarterisexpectedtoresultfromthecompany'scontinuouslygrowingsearch-basedadvertisingandstableIMandportalchannels.
Keypointstowatch:Newgamessources,SNSandopen-platformdevelopment.
KeyRiskstoRatingRapidmonetisationofitsSNSplatformsandchangeinitsIVASAPRUstrategy.
ValuationWereaffirmourSELLratingandtargetpriceofHK$185.
00,asweseeunattractiveriskrewardprofileaheadofresults.
MarketconsensusseemstopriceinaggressiveIVASandMVASgrowthinbothpayingsubscribernumbersandARPUwhichwebelieveisdifficultfortheCompanytobeat.
Our3-yearearningsCAGRfor2011-13Eis26%,whichimpliesaPEGratioof1.
08x.
BOCIResearchLimitedChina:TechnologyMichaelMeng(852)39886433michael.
meng@bocigroup.
comJohnieHu(852)39886437johnie.
hu@bocigroup.
comInvestmentSummary12-0912-1012-11E12-12E12-13ETotalturnover(RMBm)12,44019,64625,88833,20541,461Revenuegrowth73.
9%57.
9%31.
8%28.
3%24.
9%Netprofit(RMBm)5,1568,05410,32813,35516,174FullydilutedEPS(RMB)2.
794.
335.
517.
078.
50FDP/E(x)63.
3440.
8532.
0925.
0020.
79FDEPSgrowth84.
3%55.
1%27.
3%28.
4%20.
2%PreviousEPS(RMB)NANANANANAConsensusEPS(RMB)6.
047.
689.
57EPSvsConsensus(8.
8%)(7.
9%)(11.
1%)RecurrentCPS(RMB)4.
666.
787.
059.
5710P/CF(x)37.
9226.
0825.
0618.
4716.
84EV/EBITDA(x)45.
9527.
9622.
6817.
0313.
44Dividend/share(RMB)0.
400.
550.
710.
911.
10Dividendyield0.
23%0.
31%0.
40%0.
52%0.
62%ROE53.
7%47.
5%39.
3%36.
4%32.
5%.
50Source:Companydata,Bloombergdata,BOCIResearchestimates.
Closingpricesareasof6May2011.
TencentHoldingsPrice:HK$211.
6SELLTargetPrice:HK$185.
0MichaelMeng9May2011ThisdocumentmaynotbedistributedinorintothePRC.
21Q11ResultsPreviewTencentwillannounceits1Q11resultsonWednesdaythisweek.
Wesummarisebelowourrevenueforecastsandsomekeyperformanceindicators.
Althoughourforecastislowerthanconsensus,weuseabull-caseassumptiononthepositivegrowthofbothfee-basedIVASandMVASsubscribersandimprovedARPU.
Figure1.
RevenueEstimates1Q101Q11E2Q11E3Q11E4Q11EIVAS3,3874,6614,9575,3025,580MVAS618778828904980Onlineadvertising204245557459524Others1624233035TotalRevenue(Rmbm)4,2265,7096,3656,6957,120OperatingProfit2,1482,6993,0103,1483,308NetProfit1,7832,2922,5552,6732,808Source:Companydata,BOCIResearchFigure2.
KPI(m)1Q102Q103Q104Q101Q11E2Q11E3Q11E4Q11EActiveuseraccountsIM568.
6612.
5636.
6647.
6660.
6673.
8687.
2701.
0Fee-basedIVASregisteredsubscriptions59.
963.
267.
365.
769.
072.
473.
374.
4QoQgrowth1666(2)5511Fee-basedMVASregisteredsubcriptions23.
324.
125.
324.
625.
827.
329.
531.
0QoQgrowth1535(3)5685IVASARPUpermonth18.
918.
920.
522.
222.
522.
824.
125.
0QoQgrowth20891164MVASARPUpermonth8.
89.
39.
29.
910.
310.
410.
610.
8QoQgrowth(2)5(2)84122Source:Companydata,BOCIResearchKeyPointstoWatchBesidesthefinancialinformation,wethinkthefollowingpointsareworthyofattentionasTencententersanewinvestmentphasetofundfuturegrowth.
Theseinvestmentdecisionsandstrategicinitiativeswillhavesignificanteffectsonitsoveralldevelopmentinfuture.
NewgamessourcesTencent'smajoronlinegamerevenuestreamincludes'QiXiongZhengBa',theweb-basedMMOGlaunchedinAugust2010,'CrossFire','DNF'and'QQGame',thelargestmini-casualgameportalinChina.
Tencenthasundertakenaseriesofmovestosourcenewgamesfrominternationalmarkets,suchasacquiringRiotGames(anindependentdeveloperfromtheUS)togainexposuretoglobalgamingtrendsaswellaspartneringwithTokyo-basedGreetoaddmoremobilesocialgames.
FacebookentersintoChinaMarketWhileTencentissteppingupitseffortstoexpandintointernationalmarkets,FacebookisexpectedtoentertheChinaSNSmarketin2011.
AlthoughChina'sSNSmarkethasbeenheatingupamongdomesticplayers,Facebookcouldfurtherintensifycompetitionandseizemarketshare.
FacebooklauncheditssimplifiedChineseversionin2008andhasalreadysuccessfullyrampedupitspresenceinTaiwanwithover5musers.
China'stopSNScommunitywebsites,suchas'Renren'and'Kaixin'andTencent's'Pengyou',willfacethechallengesposedbyinternationalplayersandthoseofdevelopingalong-termmonetisationmodel.
TencentHoldingsPrice:HK$211.
6SELLTargetPrice:HK$185.
0MichaelMeng9May2011ThisdocumentmaynotbedistributedinorintothePRC.
3CompetitionwithSinaMicroblogThemicrobloguserbasesofbothSinaandTencenthavesurpassedthe100mmark.
WhileTencent'sQQmembersmakeupalargeportionofitsmicrobloguserbase,SinabuiltitsSNSmicroblogcommunityfromaless-concentratedusermass,thusenjoyinghighertrafficvolumeanduseractiveness.
Atpresent,themonetisationmodelisstillunderdeliberation,sowedonotexpecttoseeanyrevenuecontributioninthenearterm.
Inthemid/longterm,wearepositiveonthedevelopmentofSNSonmobileplatformsinChina.
Third-partyapplicationsonopenplatformssuchasQzoneThird-partyapplicationsbringrevenuegrowthtotheoperatingplatformbutcausemargindeterioration.
Thecompanyexperiencedsomenarrowingofmarginin4Q10,anditwilltaketimetogaugethemarginimpactofrunningopenplatforms.
TencentHoldingsPrice:HK$211.
6SELLTargetPrice:HK$185.
0MichaelMeng9May2011ThisdocumentmaynotbedistributedinorintothePRC.
4IncomeStatement(RMBm)12-0912-1012-11E12-12E12-13ETotalturnover12,44019,64625,88833,20541,461Costofsales(3,889)(6,320)(8,672)(11,521)(14,876)Totaloperatingcosts(2,608)(3,782)(5,437)(6,442)(8,043)OperatingEBITDA6,48110,32612,58616,14519,518Deprec.
andamort.
(538)(782)(807)(903)(976)OperatingEBIT5,9439,54411,77915,24218,541Netinterestincome136256346466504Exchangegains(2)(1)(1)(2)(3)Otherrecurringincome(58)38404244Associates'profit2276808488ExceptionalincomePre-taxprofit6,0419,91312,24315,83219,174Taxation(819)(1,798)(1,836)(2,375)(2,876)Minorityinterests(66)(62)(79)(102)(124)PreferreddividendsNetprofit5,1568,05410,32813,35516,174Recurringnetprofit5,1568,05410,32813,35516,174PerShareValues(RMB)12-0912-1012-11E12-12E12-13EEarningspershare2.
864.
435.
687.
358.
90Dividend/share0.
400.
550.
710.
911.
10Bookvaluepershare6.
812.
017.
023.
531.
3TangibleBVPS6.
611.
516.
623.
130.
9Netcash/(debt)pershare6.
39.
313.
420.
929.
0BalanceSheet(RMBm)12-0912-1012-11E12-12E12-13ETotalcashandequivalents11,55422,13424,60738,18852,856Accountsreceivable1,2291,7152,1652,8123,403InventoriesOthercurrentassets3741,5241,4481,4691,491Totalcurrentassets13,15725,37428,22042,46957,749Netfixedassets2,6233,6804,3115,0425,593Totalinvestments1,0415,3095,4165,5335,661Intangibleassets304803728675637Otherassets381664628580523Totallong-termassets4,34910,45611,08211,82912,413Totalassets17,50635,83039,30254,29870,162Tradecreditor6971,3805201,6891,164Short-termdebt2025,299202202202Othercurrentliabilities3,6646,3436,6468,52910,628Totalcurrentliabilities4,56313,0227,36910,42111,994Totallong-termdebtOtherliabilities370967967967967Shareholders'equity12,17921,75730,80342,64556,812Minorityinterests12084163265389Totalliabilities&equity17,50635,83039,30254,29870,162Growth12-0912-1012-11E12-12E12-13ERevenuegrowth73.
9%57.
9%31.
8%28.
3%24.
9%OperatingEBITDAgrowth85.
5%59.
3%21.
9%28.
3%20.
9%OperatingEBITgrowth89.
6%60.
6%23.
4%29.
4%21.
6%Pretaxprofitgrowth94.
6%64.
1%23.
5%29.
3%21.
1%Netprofitgrowth85.
2%56.
2%28.
2%29.
3%21.
1%Source:Companydata,Bloombergdata,BOCIResearchestimatesTencentHoldingsPrice:HK$211.
6SELLTargetPrice:HK$185.
0MichaelMeng9May2011ThisdocumentmaynotbedistributedinorintothePRC.
5Cash-flowStatement(RMBm)12-0912-1012-11E12-12E12-13EPre-taxprofit6,0419,91312,24315,83219,174Depreciation406670632750839Goodwill&otheramort.
132112174153137Netinterest(136)(256)(346)(466)(504)Changeinworkingcapital2,1062,3491,1242,4321,018Taxpaid(456)(872)(1,023)(1,323)(1,603)Otheroperatingcashflow3284799096102Operatingcashflow8,39812,31812,81517,38919,076Capex(789)(1,488)(1,273)(1,493)(1,404)Cashflowfromdisposals12---Acquisitionofsubsidiaries(148)(512)(107)(118)(130)Others(4,088)(10,016)(13,042)(4,834)(5,190)Cashflowfrominvesting(5,025)(12,015)(14,422)(6,444)(6,723)Sharesrepurchased(178)(478)---Debtissued2025,097---Proceedsfromissueofshares165199---InterestreceivedDividendspaid(587)(706)(999)(1,282)(1,657)InterestpaidOthercashflowfromfunding--5,0783,9173,971Cashflowfromfinancing(397)4,1124,0782,6352,314Totalcashgenerated2,9764,4152,47213,58014,667Freecashflowtofirm3,374303(1,607)10,94512,353Freecashflowtoequity3,5765,400(1,607)10,94512,353KeyRatios12-0912-1012-11E12-12E12-13EProfitabilityEBITDAmargin52.
1%52.
6%48.
6%48.
6%47.
1%EBITmargin47.
8%48.
6%45.
5%45.
9%44.
7%Pre-taxmargin48.
6%50.
5%47.
3%47.
7%46.
2%Netprofitmargin41.
4%41.
0%39.
9%40.
2%39.
0%LiquidityCurrentratio2.
91.
93.
84.
14.
8InterestcoverageratioNetdebttoequityNetcashNetcashNetcashNetcashNetcashQuickratio2.
91.
93.
84.
14.
8ValuationP/E(x)61.
839.
931.
124.
119.
9CoreP/E(x)61.
839.
931.
124.
119.
9P/B(x)26.
214.
810.
47.
55.
7P/CF(x)37.
926.
125.
118.
516.
8EV/EBITDA(x)45.
928.
022.
717.
013.
4ActivityratiosInventorydaysAccountsreceivablesdays36.
131.
930.
531.
030.
0Accountspayablesdays65.
479.
721.
953.
728.
6ReturnsDividendpayoutratio14.
0%12.
4%12.
4%12.
4%12.
4%ROE53.
7%47.
5%39.
3%36.
4%32.
5%ROAA37.
7%30.
2%27.
5%28.
5%26.
0%ROACE62.
0%49.
4%41.
6%42.
3%37.
9%Source:Companydata,Bloombergdata,BOCIResearchestimatesTencentHoldingsPrice:HK$211.
6SELLTargetPrice:HK$185.
0MichaelMeng9May2011DISCLOSURETheviewsexpressedinthisreportaccuratelyreflectthepersonalviewsoftheanalysts.
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