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Will Tencent’s share price hit new highs?

Tencent's [0700] share price is up a huge 40.95% since the start of the year. Driving the gains are impressive first quarter 2020 results that show the company has been going from strength to strength so far this year. 

In the results, total revenue came in at RMB 108,065 million, up 26% on the same quarter last year. Operating profits were also strong at RMB 35,575 million, a 25% increase from the previous year.

Online games revenues grew by 31% to RMB 37,298 million, with strong sales from domestic smartphone games like Peacekeeper Elite and Honour of Kings. Revenue across social networks, online advertising and smartphone gaming also saw substantial gains.

So, what are the growth drivers that could see Tencent’s share price hit new highs for the remainder of 2020?

 

 

What could see Tencent's share price level up further?

Partnership with Voodoo

Tencent’s share price could stand to benefit if it follows through on its potential plan to take a minority stake in French mobile game developer Voodoo. The deal would be worth almost € 500 million and would give Tencent between 20% and 25% ownership. However, reports that other potential bidders include Ubisoft and Zynga suggest that Tencent won’t win the deal without a fight.

Voodoo is no slouch in mobile gaming. The French developer saw $400k in mobile app revenue in June and 142 million app downloads, according to data from Sensor Tower. Should Tencent win out, they would have access to Voodoo's library of games, including Cube Surfer which was downloaded 3 million times in June.

142million

Number of downloads of Voodoo app

  

Daniel Ahmad, a Senior Analyst at Niko Partners, highlights that the deal would give Voodoo access to millions of Chinese players through WeChat Mini Games. And for Tencent, Ahmad says the deal would continue its "silent global expansion through identifying gaming firms to invest in or acquire.” As the company becomes a more global proposition, Tencent’s share price could continue to gain.

 

Online advertising set to grow 29%

One factor giving analysts confidence in Tencent's share price is the amount of revenue it generates through WeChat advertising. In June, analysts at Bernstein bumped their price target to 570 HKD following suggestions that the company’s online advertising revenue is set to grow further. Hitting this target would see a 5.75% upside on Tencent’s share price through 22 July’s close. The analysts also upped their forecasts for year-on-year advertising revenue growth from 18% to 29%.

There had been concern that rival ByteDance — who already own TikTok — would steal the market share away from Tencent. However, this doesn't seem to be happening, with Bernstein claiming that the market is big enough for both companies to operate:

“We believe Tencent has reached a tipping point in advertising as its technology improved while ByteDance’s growth slows down, allowing Tencent to take further market share going forward,” the analysts said in a note to investors.

“We believe Tencent has reached a tipping point in advertising as its technology improved while ByteDance’s growth slows down, allowing Tencent to take further market share going forward” - analysts at Bernstein

 

Move into e-commerce with WeChat Minishop

July saw Tencent launch WeChat Minishop within its incredibly popular WeChat mobile messaging service. The move puts Tencent up against established e-commerce heavyweights like Alibaba and JD.com. Setting it apart from the competition, however, is Minishop’s lack of fees. By allowing businesses to set shops up for free, without the need for developers, Tencent could be able to poach smaller businesses from fee-charging rivals like Alibaba. 

Data from Minishop users, and how they use other Tencent products like WePay, could also be used to deliver more targeted online ads to shoppers. Given that WeChat has over a billion users this could be a significant new income stream for the company, helping Tencent’s share price climb higher in the long-term.

 

Market Cap$664.435bn
PE ratio (TTM)51.54
EPS (TTM)1.36
Quarterly Revenue Growth (YoY)26.4%

Tencent share price vitals, Yahoo Finance, 23 July 2020

 

What do the analysts think?

The growth in mobile gaming and a growing online advertising business have driven Tencent’s share price to new highs, and analysts seem to think there is still room for further growth.

On the Financial Times, those tracking the stock have pinned an average 534.85 HKD price target on Tencent. Hitting this would see a 0.77% downside  on Tencent's share price as of 22 July’s close. Of the 47 analysts offering recommendations, however, Tencent has 19 Buy and 25 Outperform ratings, suggesting analysts are still confident that Tencent will continue to gain.

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