Tencent Earnings: Strong Earnings Underpinned by Major Margin Expansion

Shares are undervalued, with a 50% discount.

Morningstar 17 November, 2023 | 0:04
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Tencent Stock at a Glance


Tencent Earnings Update

Wide-moat Tencent’s third-quarter earnings were ahead of Refinitiv's consensus but in line with our estimates. We maintain our HK$ 704 fair value estimate. We continue to view Tencent’s shares as deeply undervalued, trading at about a 50% discount to our valuation. Although our near-term forecasts do not deviate significantly from consensus, we have a much higher valuation on the stock given our view that Tencent’s network effects will generate excess economic returns over a long period. We think the market continues to underestimate how much economies of scale will benefit Tencent’s profitability in the long term. We believe that the current valuation multiple of 12 times 2024 core earnings, offers a very attractive upside to long-term investors.

Amid Tencent's impressive high-margin quarter, an important question arises regarding the maintainability of its current profitability. We believe that the answer is yes. During the earnings call, Chief Strategy Officer James Mitchell emphasized the significance of recognizing that large teams can hinder the focus and efficient execution of businesses. Looking ahead, he intends to maintain smaller teams comprising exceptional individuals who can concentrate on value-added tasks. This strategic approach aligns with our own observations that many Chinese internet companies struggle with the challenges posed by large teams. Tencent's proactive efforts to address this issue provide us with a reassuring indication that there is ample potential for further efficiency improvements.

One additional management comment relating to Tencent's capital management stood out to us. When asked questions on shareholder returns, management repeatedly emphasized share repurchase is the primary way Tencent will be returning capital to shareholders. We believe this comment effectively dispels rumors that another distribution of shares to its investees, like what it did with JD and Meituan, will happen again in the near future.

Admittedly, Tencent shares have faced a challenging confluence of factors comprising domestic regulatory crackdowns, geopolitical tensions, and the adverse effects of the COVID-19 pandemic. While these factors have negatively affected investor sentiment toward Tencent, we do not believe events that happened over the past two years have eroded the competitive advantages enjoyed by Tencent. As the Chinese government swings to a progrowth stance, we have confidence that fears over long tail risks will gradually subside, and Tencent’s valuation multiples should go up as a result. 


Ivan Su, senior equity analyst at Morningstar.

Previous earnings news for Tencent Holdings.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Tencent Holdings Ltd389.00 HKD3.18Rating

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