Tencent delivered strong 1Q20 results, with revenue/adj. net profit +26% YoY/+29% YoY, +7%/+10% above consensus. We are more bullish on its game momentum with globalization and positive COVID-19 impact, and strong social ads also impressed us. 2Q20E could be another solid quarter, and we suggest keeping eyes on upcoming DNF Mobile. We raised its EPS by 2%/9%/10% in FY20/21/22E, and lifted our TP to HK$500 from HK$440. Maintain BUY.
- 1Q20 all-round beat. 1Q20 revenue was RMB108.1bn, up 26% YoY, 7%/2% above consensus/our estimate, mainly on strong games and social ads. Non-GAAP net profit grew 29% YoY to RMB27.1bn, 9%/0% above consensus/our estimate. We are impressed by its game momentum (+31% YoY) and social ads performance (+47% YoY), and keep confident on its growth in next few quarters. We believe this eye-catching result would drive its price up, coupled with better outlook and multiple catalysts.
- Strong game to continue in 2Q20E. Game surged 31% YoY in 1Q20 (vs. +25% in 4Q19), in which mobile game +64% YoY (higher than consensus of ~40% YoY), mainly driven by strong key titles (e.g. HoK, PUBG Mobile) and increasing overseas contribution. We keep positive on its game momentum in 2Q20E, considering 1) overseas contribution with strong PUBG Mobile and Clash of Clans, under global COVID-19; 2) deferred revenue from solid key titles (deferred revenue +63% YoY in 1Q20); and 3) new game titles (e.g. DNF Mobile) to bring further upside.
- Better-than-expected ads recovery. Ads grew 32% YoY in 1Q20 (vs. 19% in 4Q19, higher than market expectation of +20% YoY), mainly driven by increased ads inventories & impressions and 4th Wechat momentum ads rollout. By segment, social ads/ media ads +47%/-10% YoY (vs. +37% YoY/-24% YoY in 4Q19). We view the ads growth much better than street estimates, and we believe Tencent ads would be more resilient to COVID-19 than other players. With continued share gain, we expect its ads to grow 23% YoY in FY20E (vs. previous 18%).
- Maintain BUY. We raised its EPS by 2%/9%/10% in FY20/21/22E, and lifted our SOTP-based TP from HK$440 to HK$500. Our new TP is equivalent to 29x FY21E P/E. Tencent could be more defensive under COVID-19 impact, and we suggest investors to watch its 2Q20E performance on strong mobile games, overseas expansion and solid social ads. Maintain BUY.
