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Is Tencent’s share price undervalued as traders overlook international potential?

The share price of Chinese internet company Tencent [TCEHY] was having a moment of respite at the start of the year, after being pummelled for the majority of 2018. But as trade war rhetoric hardened again, the stock has been beaten further. 

Since President Donald Trump announced he would increase tariffs on $200bn of Chinese goods by 25% on 10 May, Tencent’s shares have tumbled by 11%.

The company has said that it expects macro headwinds to affect it for the entirety of 2019, but is this projection, along with wider worries about the ongoing trade war, masking the fact that Tencent in the long-term is very much a global – rather than pure China – play?

 

The world’s largest gaming company

While Tencent’s key aim may always be to tap into China’s market of 1.4bn people, the fact is that, as well as being the largest game publisher in the world by revenue, it has large stakes in the biggest US and European gaming companies, meaning that money is flowing in from outside of its home territory, as well as in.  

The company owns large stakes in a slew of US game makers: 100% of League of Legends maker Riot Games, 48.4% of Fortnite maker Epic Games, 15% of Glu Mobile and 5% of both Activision and Ubisoft. It also owns 84.3% of Finland’s Clash of Clans maker Supercell. The firm has acquired a 12% stake in Snap Inc. too, with plans to roll out gaming on the platform. 

While its gaming growth has slowed in recent months, slipping by 1% in the first quarter of 2019 due to a stricter regulatory environment set by the Chinese government, Tencent has made a bid to expand further into international to boost sales. A key play will be expanding the mobile version of Call of Duty across the US, Japan, Europe, Latin America and Southeast Asia. 

Gaming currently drives the majority of Tencent’s profits, amounting to $19bn in 2018. What’s more is the company is set to lead the cloud gaming market, a strong position to be in with 5G roll-out ahead. IHS Markit forecast that the industry is set to grow by $2.5bn by 2023.

$2.5bn

Predicted value of the cloud gaming industry by 2023

 

A hand in entertainment

Tencent’s video segment is targeted at Chinese viewers, but as it bids to become the leading entertainment provider in the territory, it has also made a range of global investments that it could profit from. 

Tencent’s film distribution company Tencent Pictures, for example, has made a list of high-profile investments in Western blockbusters that it will profit from whether they do well in China or not. Recent investments include Top Gun, Bumblebee, Men in Black and Venom. 

 

Music outreach

In China, Tencent is the leading music provider, but recent investments highlight that the internet company’s influence could stretch its reach outside the territory too.

Currently, the company is working on a deal with Vivendi which would see it gain a 10% stake in Universal Music Group – home to Lady Gaga, Taylor Swift, Drake and Kendrick Lamar. If the deal is to go through, the company would then have an option to buy a further 10% of UMG within a year.

UMG is estimated to be worth between €17bn and €44bn, a value that Tencent would benefit from whether its business does well in China or not.

 

Consensus

 

Market cap $393.11bn
PE ratio (TTM) 32.11
EPS (TTM) 1.36
Profit Margin 26.17%

Tencent share price vitals, Yahoo finance, 10 September 2019

 

CNN shows that out of 49 polled investment analysts, 40 consider Tencent a ‘buy’, 6 consider it an ‘outperform’, 3 a ‘hold’ and 0 an ‘underperform’ or ‘sell’. 

For 45 analysts offering 12-month price forecasts, a median target is 53.53, a high estimate is 61.20, and a low estimate is 38.24. The median estimate represents a 22.78% increase on the current share price.

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