Tencent will announce its 3Q19 result on 13 Nov. Despite already-low market expectation, we expect its 3Q19E topline to be soft again, mainly on weak ads and Fintech business. Margin might see upside for its disciplined cost control and slower M&A. Our TP of HK$420 is unchanged. Maintain BUY.
- 3Q19E preview: soft topline, but with margin upside. We forecast a 20% YoY revenue growth to RMB96bn in 3Q19E (3% below consensus), and expect adj. net profit up 26% YoY to RMB25bn (1% above consensus). Soft topline was mainly due to ads pressure and Fintech deceleration, while margin upside derives from effective cost control. Stock price might see short term pressure on its soft ads outlook and unsurprising results. However, in the long run, we keep positive on its game momentum and new business expansion.
- Mobile games to maintain strong momentum. We forecast 3Q19E games revenue to grow 11% YoY (vs. 8% YoY in 2Q19), in which mobile/PC games +28%/-10% YoY. Mobile games growth was mainly driven by solid HoK, Peacekeeper Elite contribution, and new game launches (e.g. Crazy Racing). We see high visibility for its mobile game to accelerate in 4Q19E, for rising contribution from Peacekeeper Elite and new games. PC games will still see pressure in the short run.
- Still cautious on ads outlook. We forecast 3Q19E ads revenue to grow 13% YoY (vs. 16% YoY in 2Q19), in which social ads/ media ads +27%/-22% YoY. We expect challenging ads trend to continue in 2H19E, mainly on: 1) continued macro headwinds; 2) increasing ads inventory from top newsfeed and short video; and 3) soft video ads momentum.
- Maintain BUY. We keep our full-year financial forecast unchanged, and maintain our TP of HK$420, which is equivalent to 38x/31x FY19/20E P/E. We think market might well anticipate its solid earning in 3Q19E, ads outlook and more color on games pipeline would be key focus.
