Summary. Tencent's 2Q19 result miss on already-low topline, despite margin beat. We think market will focus more on its game & ads trend, rather than earnings number. Stock price might see short term pressure on its soft ads outlook and unsurprising results. But in the long run, we keep positive on its game momentum and new business expansion. Potential game acceleration in 2H19E could be further catalyst. We cut revenue by 3%/4%/3% in FY19/20/21E but raised adj. net profit 2%/3%/2% in FY19/20/21E, to reflect ads headwinds but effective cost control. Our TP of HK$420 is unchanged. Maintain BUY.
- 2Q19 margin beat while topline miss. 2Q19 revenue grew 21% YoY, 5% below consensus, mainly on soft ads revenue. Adj. EPS came out at 19% YoY, 3% above consensus, mainly on lighter-than-expected S&M expenses and non-operating income (~Rmb2.4bn).
- Games: expecting stronger momentum in 2H19E. 2Q19 games revenue grew 8% YoY, in which mobile/PC games +26%/-9% YoY. We believe mobile momentum has been well anticipated by the market, while PC games is lower than expectation. However, we suggest market to look beyond 2Q19 numbers, as we turn more positive on 2H19E mobile game recovery, mainly on: 1) solid HoK and Peacekeeper Elite with strong pipeline; 2) deferred revenue growth accelerated to 25% YoY (vs. +9% YoY in 1Q19); 3) new games launched in 2Q19 & 3Q19 to contribute more in 2H19E (e.g. Peacekeeper Elite, JXIII, KartRider Rush); and 4) low base in 2H18. We forecast its game revenue to grow 8% YoY in FY19E.
- Ads headwind yet over. 2Q19 ads revenue came in at 16% YoY, below already-low market expectation, for its weak media ads (-7% YoY) partly offset by solid social ads (+28% YoY). We expect challenging ads trend to continue in 2H19E, mainly on: 1) macro headwinds yet over; 2) increasing ads inventory from top newsfeed and short video (e.g. Toutiao, Douyin, Kuaishou); and 3) potential delay of costume drama series.
- Maintain BUY. Given its softer ads, we cut revenue by 3%/4%/3% in FY19/20/21E. However, Tencent guided disciplined cost control and slower M&A. To factor in its lighter expenses and higher other income, we lifted adj. net profit by 2%/3%/2% in FY19/20/21E. We keep our TP of HK$420 unchanged, which is equivalent to 38x/31x FY19/20E P/E. Maintain BUY.
