On Thursday, Benchmark reaffirmed its Buy rating on Tencent Holdings (HK:0700) (700:HK) (OTC: OTC:TCEHY), maintaining a price target of HK$540.00. The firm's analysis of the company's third-quarter performance highlighted Tencent's effective management in a challenging economic climate. The company's gaming division remained on course, and its marketing services performed better than expected, although its Fintech and Business Services (FBS) experienced some softness due to ongoing consumer spending challenges.
Benchmark's outlook for Tencent is positive, especially for the gaming sector in the fiscal year 2025. This optimism is based on favorable gross billing trends, the success of new game launches, and a strong gaming pipeline.
Despite the uncertain economic landscape, the analyst sees multiple catalysts for growth in Tencent's advertising segment. These include an increase in advertising load, advancements in advertising technology, and the potential of Mini Programs to facilitate closed-loop transactions, which are expected to underpin a resilient growth in advertising revenues.
Moreover, Tencent's strategic emphasis on high-quality growth is anticipated to yield faster earnings growth relative to revenue growth. This focus is aligned with the company’s long-term objectives and is expected to contribute to the company's financial health.
The analyst's comments underscore the belief that Tencent's diverse portfolio and strategic initiatives are well-positioned to navigate the current economic headwinds. With a robust pipeline in its gaming division and potential in its advertising business, Tencent is poised for sustained growth in the upcoming fiscal year.
Tencent Holdings, a leading provider of internet services globally, is expected to continue leveraging its strong market position and innovative offerings to drive growth amid the varying macroeconomic conditions. The company's commitment to high-quality growth is a key factor in Benchmark's continued endorsement of Tencent as a Buy.
In other recent news, Tencent Holdings reported a notable 8% rise in total revenue, reaching RMB 167.2 billion in the third quarter of 2024. This growth was backed by a significant 33% increase in net profit attributable to equity holders, which amounted to RMB 59.8 billion. The company's earnings per share also saw a 36% boost, reaching RMB 6.34. These positive results were primarily driven by robust performance in the games segment, digital content, and marketing services.
Nomura/Instinet reiterated a Buy rating for Tencent, noting an 8% year-over-year increase in total revenue, which aligned with the Bloomberg consensus. The company's non-IFRS earnings rose by 33% year-over-year, surpassing both the Street's and Nomura's expectations. This surge was primarily attributed to higher-than-expected non-operating income and lower tax fees.
Tencent's gross margin saw a notable improvement, increasing by 3.6 percentage points year-over-year to 53.1% in the third quarter. The company's value-added (VA) ads revenue experienced a 17% year-over-year growth, exceeding market predictions. This increase was primarily driven by revenue from Video Account (VA), Mini Programs, Weixin Search, and contributions from Paris Olympics-related brand advertising.
In addition to these developments, Tencent continues to invest in AI technology and is expanding its e-commerce strategy through Weixin Mini Shops.
The company launched Hunyuan Turbo to enhance AI capabilities and efficiency. Despite facing challenges in the short video and live streaming e-commerce markets, Tencent remains optimistic about its international games revenue and the long-term prospects of the Mini Shops and e-commerce business.
InvestingPro Insights
Tencent's robust financial position and strategic initiatives align well with Benchmark's positive outlook. According to InvestingPro data, Tencent boasts a market capitalization of $477.18 billion, reflecting its significant presence in the Interactive Media & Services industry. The company's P/E ratio of 23.1 suggests a reasonable valuation relative to its earnings, especially considering its strong revenue growth of 7.91% over the last twelve months.
InvestingPro Tips highlight Tencent's financial strength and market position. The company has been profitable over the last twelve months, with analysts predicting continued profitability this year. This aligns with Benchmark's expectation of faster earnings growth relative to revenue growth. Additionally, Tencent's management has been aggressively buying back shares, potentially indicating confidence in the company's future prospects.
Tencent's ability to maintain dividend payments for 20 consecutive years, despite a recent dividend growth decline, demonstrates its commitment to shareholder returns. This, coupled with the company's moderate debt level and sufficient cash flows to cover interest payments, supports Benchmark's view of Tencent's financial health and ability to navigate economic challenges.
For investors seeking more comprehensive insights, InvestingPro offers 5 additional tips that could provide further context to Tencent's market position and growth potential.
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