Tencent delivered soft 3Q19 results, with revenue/adj. net profit +21%/+24% YoY, 2%/2% below consensus (but in line with our estimate). We think the market has partly anticipated such soft results. Stock price might see short term pressure, but we suggest investors to look ahead to its 4Q19E performance, with potential mobile game acceleration and ads stabilization. We maintain our financials unchanged, with TP of HK$420. Maintain BUY.
- 3Q19 soft on topline. Despite already-low market expectation, Tencent’s 3Q19 financials were soft again, as stated in our preview report. 3Q19 revenue was RMB97.2bn, up 24% YoY, 2% below consensus but in line with our estimate, mainly on light PC games and media ads. Non-GAAP net profit grew 24% YoY to RMB24.4bn, 2% below consensus (in line with our estimate).
- Games in line, expecting 4Q19E mobile game to accelerate. PC games pressure continued, with revenue -7% YoY (-2% QoQ, vs. our estimate of -10% YoY), due to reduced revenue from DnF and users shifting to mobile. Mobile games maintained solid momentum, +25% YoY, but below our estimate of +28% YoY (mainly on deferred revenue recognition of Peacekeeper Elite). We think 3Q19 games performance has been well anticipated by the market, and we see high visibility for its mobile games to accelerate in 4Q19E, for rising contribution from Peacekeeper Elite and hot titles newly launched.
- Moving to potential ads recovery. 3Q19 ads +13% YoY (in line with our estimate), with social ads/media ads +32%/-28% YoY (vs. our estimate of +27%/-22% YoY). We are impressed with social ads acceleration in 3Q19, despite weak media ads. Looking ahead, there would be possible ads recovery following 3Q19, as stated by mgmt. We expect ads sentiment to stabilize in the few quarters, based on our cross check. More upside could derive from: 1) Tencent video to rebound after content regulations; and 2) upside from Weixin moments and mini program.
- 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 suggest investors to look ahead to its 4Q19E performance, with potential mobile games acceleration and ads stabilization. Maintain BUY.
