2021-08-05

(7 Pages, 5 graphs and tables)
Listen to analyst’s audio summary

  • We downgrade Tencent to HOLD. We believe Tencent is: 1) losing dominant position in traffic; 2) lack of a competitive gaming pipeline in the near term; 3) facing uncertainty in regulation.
  • Tencent may still have several catalysts, including <LOL Mobile>, <DNF Mobile>, and Channels (视频号). Yet, these catalysts are relatively minor compared with the above downside risks.
  • Our Tencent 2Q21’s result is in-line with cons, and we slightly cut Tencent 2021’s mobile gaming and ads revenue growth. Our latest TP implies 36.7/31.8 PE in 21/22.
Tencent is facing more pressure from Bytedance
Over a long period, Tencent’s major apps have been showing a lukewarm trend in user and time spent growth. For example, according to Questmobile, DAU of Wechat remains at around 800 mn and average user time spent was about 85 minutes in 1H21, which represents about 3%-5% YoY growth. On the other hand, DAU of Douyin had about 30% YoY growth in 2Q21. More importantly, Bytedance has been proactively increasing penetration in various sectors, like gaming, Ecommerce and local service. Besides, Bytedance is creating the synergy by sharing the user behaviour data across apps, including Douyin, Jinri Toutiao(今日头条), Dongchedi(懂车帝), Fanqie Xiaoshuo(番茄小说)etc. As a result, Bytedance has more advantage in amount and quality of traffic than Tencent.
 
Losing advantage in gaming and advertising
Tencent’s dilemma has been reflected in some recent cases: 1) Tencent is marginalized in the generating process of hit titles. Tencent used to have tight control over all most powerful IPs and games, but most recent titles, like <Genshin Impact> and <Mole>, chose to skip Tencent channels. Bytedance recently published <Onepiece: Hot-Blooded Route> (航海王:热血航线). Although quality of the game is ordinary, Bytedance demonstrates extraordinary publishing skills by mobilizing Douyin influencers to promote the game. 2) Our channel check suggests that PDD is shifting ads budget away from Tencent to Douyin/Kuaishou due to declining ROI. If Tencent is losing traffic advantage, then relationship with allies like PDD, JD and Meituan, will also be impacted.

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