About Tencent (SGX: HTCD): A Global Leader in Digital Services

Established in 1998, Tencent has become one of the most recognised companies in China and globally, with diverse operations spanning communications, social networks, gaming, music, and cloud services. 

It’s not only the world’s largest gaming company by revenue but also owns Weixin and WeChat, China’s biggest social networking app, with 1.3 billion active users each month.

Well-Diversified Revenue Streams

Tencent’s income is drawn from five main areas: Social Networks (19%), Domestic Games (20%), International Games (9%), Online Advertising (18%), and Fintech and Business Services (33%). 

This broad revenue base has allowed Tencent to sustain an annual growth rate of 14% over the past five years, even as China’s economic growth slowed and regulatory actions affected the domestic gaming market.

Tencent is well positioned in growing gaming industry

The gaming industry in China is expected to maintain a steady growth trajectory, with a compound annual growth rate (CAGR) of 7.6% from 2024 to 2029. 

This growth will be largely driven by the continued expansion of mobile gaming and the rising popularity of mini-games integrated into apps like WeChat, which have broadened the gaming market by appealing to a wider range of consumer segments.

Additionally, the industry will benefit from the growing prominence of e-sports. China currently has the world’s second-largest e-sports user base at 488 million and is on track to surpass the United States as the leading e-sports market.

As a first-mover in the gaming industry and with its consistent investment in new and established game franchises, Tencent is well positioned to capitalise on both the structural growth of the Chinese gaming market and opportunities in global markets.

Tencent owns several popular gaming franchises, including King of Honors, Naruto Mobile, Dungeon and Fire, and Valorant. 

It has successfully capitalised on these established titles with regular updates and global expansion. King of Honors, for example, has been China’s top-grossing game since 2016. 

Tencent also actively invests in new game studios, expanding its portfolio with titles like Black Myth: Wukong, which has sold 20 million copies since its release in August 2024. 

Although this title’s direct impact on Tencent’s profits may be limited due to the company’s size, it showcases potential growth in Tencent’s gaming business.

Economic Recovery in China Could Benefit Tencent

Since September 2024, China has implemented economic policies aimed at boosting consumption and consumer confidence. 

This may aid Tencent’s advertising and Fintech and Business Services segments, which had been impacted by the economic slowdown in corporate spending and advertising revenue.

Strong Q3 Performance Despite Economic Challenges

In Q3 2024, Tencent reported a net profit of RMB 59.8 billion, a 33% increase year-on-year. 

Revenue reached RMB 167 billion, an 8% rise compared to the previous year, with gaming revenue growing by 9%, supported by strong international sales and the release of Dungeon and Fire in China. 

Operating profit rose by 19% due to gains from operational scale.

Sound Cash Management and Share Buybacks

Tencent’s operations generated surplus cash, with free cash flow of RMB 58.5 billion in Q3 2024 and a net cash position of RMB 95.5 billion. 

The company had earlier increased its share buyback programme, targeting a total of HKD 100 billion in buybacks for 2024.

Key Risks

Tencent faces regulatory risks, particularly in the gaming sector, which has been scrutinised by Chinese regulators for time restrictions on minors and slower approval processes for new titles. 

Any further regulatory tightening could impact Tencent’s gaming revenue and profit growth.

Valuation

Despite a 38% rise in share price so far this year, Tencent trades at a relatively low price-to-earnings ratio of 14.7x, lower than the average of global peers.

You can now trade Tencent through Hong Kong Singapore Depository Receipts (SDRs).

These HK SDRs offer investors a more accessible way to invest in five Hong Kong-listed companies, including Tencent.

In particular, Tencent can now be purchased with a lower minimum outlay through SDRs. These SDRs will also be custodised in your CDP account. 

Join the Beansprout Telegram group for the latest insights on Singapore stocks, REITs, bonds and ETFs. 

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