UOB Kay Hian analysts Julia Pan and Oong Chun Sung have maintained their “buy” call and increased their target price on Tencent Holdings to HK$588 ($101.30), up from their previous figure of HK$535.
In a Sept 9 report, the analysts note that Tencent has rebounded almost 25% since its low in August 2021. According to them, this means that the impact of the regulatory changes has been priced in at the current stage.
“Although Tencent is still facing the trough regulation environment, including cybersecurity, under-aged user protection and the antitrust regulations storm, we believe Tencent’s overseas games, unique position in the metaverse, WeChat+QQ ecosystem and SaaS+Cloud still have strong product advantages,” Pan and Oong write.
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They highlight its so-called metaverse (defined by Forbes as “a term typically used to describe the concept of a future iteration of the internet, made up of persistent, shared, 3D virtual spaces linked into a perceived virtual universe”) and online gaming segments.
Tencent's meta-universe programme will be anchored by its online game and social content and it will increase its investment in next-generation games in the gaming sector.
They think QQ will lead this frontier, given its strong presence among millennials with its diversified ecosystem which has the potential to form a meta-universe, such as the QQ show, similar to virtualised avatar.
QQ also provides users with a variety of virtual social scenes, such as a study room and communal streaming and is expected to achieve deep integration in the future
In addition, its Platform and Content group (PCG) has tested the first gaming social product named "NokNok” or “Noisy Community", which is positioned as a community platform for group chat games, with plans to support cross-end capabilities.
Tencent also owns 1.5% of the platform Roblox, which enables users to interact with each other in the virtual world. Roblox recorded total daily active users (DAU) of 43.2 million as of June, and has entered the Chinese market via a joint venture (JV) with Tencent.
Separately, Pan and Oong see that Tencent’s online gaming segment is complementary to this “metaverse”, as it has been consistently increasing its investments in social media, games, and entertainment in order to improve user experience and retention rate.
As content has played a major part in attracting users into the metaverse, the analysts have observed various strategic investments by Tencent in local and overseas gaming studios to develop “triple-A standard” online games as well as constantly researching open-world games.
Taking into account intensified domestic regulation, they believe Tencent will continue to shift its focus to strengthening its overseas gaming investments.
During 2QFY2021, Tencent’s overseas gaming revenue growth had surpassed domestic gaming growth (37% vs 9%) driven by solid performance of its existing pipelines, such as games like HOK and PUBG.
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According to Newzoo, 78% of Chinese consumers aged 14- 50 are interested in socialising within games, compared to the US’ 57%, Japan’s 47% and the UK’s 47%, which implies ample room for innovation to capture this market share.
To date, Tencent has bought back 2.2 million of shares worth HK$1 billion, a move, which the analysts see as a sign of confidence by its management on the company’s long-term growth.
However, Pan and Oong warn that considering the increasing investment,potential tax hike and the rectification of open-screen ads and online education ads, the company’s short-term earnings growth will be “under pressure”, but upward growth should be sustained in the medium to long term.
As at 2.45pm, shares of Tencent are trading at HK$476.80, with a FY2021 price to earnings ratio of 30.8 and dividend yield of 0.4%.
