Tencent 0700 04 (Oct 21 - Dec 25)

[winston]

not vested

Tencent Holdings (700 HK)
Recommendation : BUY
Fair Value : HKD 640.00

RIDING ON AI ADOPTION AND MONETISATION

• Beat on both revenue and earnings with accelerated growth across key business segments

• Solid deferred revenue growth

• Accelerating artificial intelligence (AI) integration and Cloud


Tencent delivered a strong set of 4Q24 results with revenue beating consensus estimates by 2%, having increased 11% year-on-year (YoY), attributable to accelerated growth across key business segments.

Management laid out a clear strategy and roadmap in accelerating AI integration which we believe should address many key issues.

Tencent remains a core holding in the internet and platform industry and should benefit from the acceleration and broadening of AI adoption, and a recovery of domestic consumption.

Tencent’s overall business fundamentals is improving with sustainable growth in games and online ads.

Tencent’s Weixin ecosystem, and solid domestic and global gaming business offers vast monetisation opportunities.

The company has been stepping up in AI-related CAPEX with a CAPEX guidance of around low-teens percentage of revenue in 2025, and still focuses on shareholder’s returns.

2024 buybacks amounted to HKD112b, higher than the target of HKD100b.

Management guided 2025’s buyback target to be more than HKD80b.

Catalysts to watch out for includes:
i) any updated and new AI models to be released in the future. For instance, an upgraded Hunyuan T1 model will be released later this week;
ii) any new and upgraded features being integrated into Weixin and/or Yuanbao.

The stock is trading at 18x forward price-to-earnings (P/E), which is close to its historical average level of 19x forward P/E.

We revise up earnings estimates by 7% this year and lift our fair value estimate to HKD640.00 based on sum of the parts (SOTP) methodology and implies 20x forward P/E.

Source: OCBC