Tencent | Best of a bad situation
Tencent's Q3'18 non-GAAP results were underwhelming as gaming regulation remains in limbo. Non-GAAP operating profit and diluted non-GAAP EPS increased by 4% y/y and 15% y/y, respectively, compared to revenue growth of 24% (Q2'18: +7% y/y). Gaming revenues decreased 2.7% y/y compared to an average growth rate of 60% for the previous eight quarters.In our view, Tencent is self-regulating its gaming platform, placing itself on the front foot should more stringent formal regulation be implemented in China. However, the gaming regulatory and US-China trade war concerns have caused Tencent's one-year forward PE to derate from c.42x to c.25x since its late Jan'18 high. We have adjusted our earnings estimates due to the regulatory concerns. We note that our respective 11%, 10% and 6% decreases in FY'18, FY'19 and FY'20 to diluted non-GAAP EPS does not compare to the 39% decrease to Tencent's share price from the late Jan'18 high. We expect growth to return to the Chinese gaming industry once the regulatory concerns clear. However, we believe the industry will be more concentrated and with tighter regulation.
Tencent Holdings Limited is an investment holding company principally involved in the provision of value-added services (VAS) and online advertising services. The Company operates through three main segments. The VAS segment is mainly involved in provision of online/mobile games, community value-added services and applications across various Internet and mobile platforms. The Online Advertising segment is mainly engaged in display based and performance based advertisements. The Others segment is mainly involved in provision of payment related services, cloud services and other services.
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