Tencent: Impressive Advertising Revenue in a Tepid Market

The internet and gaming giant announces mixed results but, we see no reason to alter our long-term growth assumptions, given its growth engines remain intact

Morningstar 18 August, 2023 | 8:21AM
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Tencent Stock at a Glance


Tencent Earnings Update

Although wide-moat Tencent's second-quarter results were slightly behind our estimates (but in line with Refinitiv consensus), we see no reason to alter our long-term growth assumptions, given its growth engines remain intact.

We therefore maintain our fair value estimate of HKD 704 per share. With the core business trading at around 7% free cash flow yield, we view Tencent's shares as very undervalued. We also believe the market underestimates the longer-term revenue contribution from Video Accounts and the potential for more operating leverage as the internet giant cements a more efficient cost structure.

The highlight of the second-quarter earnings was the 34% year-over-year advertising revenue growth. This is even more impressive when we consider the tepid macroeconomic conditions in China. Management attributed the above-industry growth to enhancements to advertising technology and increased monetisation of its short video platform Video Accounts. With ad load on Video Accounts running at just a fraction of that on Douyin and Kuaishou, we see room for upside potential.

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