Tencent delivered solid 3Q20 results, with revenue/adj. net profit +29% YoY/+32% YoY, 1%/2% above consensus. Mobile game momentum continued with 61% YoY growth. We keep bullish on its mobile game momentum with globalization and upcoming strong pipeline. We expect limited impact from regulations on Fintech and Antitrust due to its diversified rev source, and its steady growth strategy fits well in compliance. We keep our financial forecast unchanged, but lifted our SOTP-based TP to HK$669 from HK$624 with higher investment valuation.
- 3Q20 beat. 3Q20 revenue was RMB125.4bn, up 29% YoY, 1%/1% above consensus/our estimate, mainly on strong mobile games. Non-GAAP net profit grew 32% YoY to RMB32.3bn, 2%/0% above consensus/our estimate. Game momentum continued (+45% YoY), partly offset by moderate FBS growth. Mgmt. stated slowdown in cloud is one-time for certain projects.
- Game: more to come. Game surged 45% YoY in 3Q20 (vs. +40% in 2Q20), in which mobile game +61% YoY (well above consensus of ~50% YoY), mainly driven by strong key titles and increasing overseas contribution. This growth would partly alleviate market concern on large game deceleration during post-COVID-19 normalization. Despite DNF mobile delay, we keep positive on its game momentum ahead, for 1) overseas contribution with strong PUBG Mobile; 2) deferred revenue from solid key titles; and 3) new game to bring further upside (e.g. CoD Mobile, LoL Wild Rift). Meanwhile, its newly-launched title Moonlight Blade <天涯明月刀> performed well, which was ranked Top 5 in IOS grossing ranking after launch on 16 Oct.
- Ads to accelerate; more upside from video ads. Ads accelerated to +16% YoY in 3Q20 (vs. +13% YoY in 2Q20), backed by wider algorithmic adoption and solid education & ecommerce ads. By segment, social ads/ media ads +21%/-1% YoY (vs. +27% /-25% YoY in 2Q20). We view the ads growth largely in-line with street estimates, and expect 4Q20E ads to accelerate, driven by popular drama series (e.g. The Legend of Xiao Chuo), recovering brand ads sentiment and video ads trend.
- Maintain BUY. We keep our financials unchanged, but lifted our SOTP-based TP to HK$669 (implying 38x FY21E P/E) to reflect higher investment valuation. We expect its strong game pipeline, new initiatives expansion and mini-programs potential to unlock its secular growth.
