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Tencent Holdings Limited (TCEHY)
- Equity
- China
- Communication Services
RISK
RETURN
Key risk factors
Good trading liquidity
Resilient to price shocks
Modest price volatility
Key return factors
Strong margins and returns
Overvalued vs peers
Decent price performance
Company profileTencent Holdings Limited, an investment holding company, provides value-added services (VAS) and Online advertising services in Mainland China and internationally. The company operates through VAS, Online Advertising, FinTech and Business Services, and Others segments. It offers online games and social network services; FinTech and cloud services, and online advertising services. The company is also involved in the production, investment, and distribution of films and television programs for third parties, as well as copyrights licensing, merchandise sales, and other activities. n addition, it develops software; develops and operates online games; and provides information technology, information system integration, asset management, online literature, and online music entertainment services. Tencent Holdings Limited company was founded in 1998 and is headquartered in Shenzhen, the People's Republic of China.
Valuation: Overvalued
Multiple
TTM
NTM
P/E
25.40
16.90
PEG
1.90
-
P/B
3.90
2.90
P/S
5.30
4.50
P/FCF
16.30
17.60
EV/EBITDA
17.40
14.00
Based on key historical and expected multiples, the stock is overvalued relative to its peers. Specifically, the stock is fairly valued on P/E, overvalued on EV/EBITDA, and reasonably priced on P/FCF.
Performance: Decent
Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 15ppts and its growth accelerated by 10ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is mildly favourable.
Analyst view: Neutral
The average target price is 53 and suggests 10% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 58.3. This translates into 20% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 46.0. This is equivalent to 5% downside potential in the worst case.
Profitability: Strong
RoE
Tencent Holdings Limited reported a return on equity (RoE) of 15.8% in the last 12 months, up from 15.1% in FY23. The market consensus projects an RoE of 16.5% in FY24, again ahead of its peers.
RoA
Another important profitability metric, return on assets (RoA), amounted to 8.1% in the last 12 months, an increase from 7.3% in FY23. The market analysts predict that RoA will be 8.1% in FY24, again stronger than its peers.
RoCE
In the last 12 months, the return on capital employed (RoCE) grew to 10.6%, above the peers. The consensus estimate for FY24 for RoCE is 16.3%, again ahead of the peers.
Net margin
EBITDA margin
Historically, 0700.HK has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 21.2%, a growth from 18.9% in FY23. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 32.3% in the last 12 months, up from 30.0% in FY23.
RoIC / WACC = 2.3(strong value creation)
The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 2.3 in the past several years. This ratio implies a strong shareholder value creation. Growth: Average
Revenue
EBITDA
EPS
Free cash flow
0700.HK reported revenue of CNY 618 530mn in the last 12 months, up 2% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS grew 14% from FY23 to CNY 13.77. Market expects EPS to reach CNY 20.04127 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA has grown rapidly in recent years (positive). Net income has fallen in recent years (negative). At the same time, free cash flow has been growing poorly in recent years. We emphasize the highly volatile dynamics of EBITDA, EPS and FCF. On the positive side, revenue dynamics is very stable.
Dividends: Modest
Dividend paid
Dividend yield
The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are unclear. In the past 12 months, the dividend yield has barely been above zero and was substantially below that of its peers. On average, the company pays dividends annually.
Default risk: Moderate
The risk of default is moderate. We note strong positions in its industry, robust profitability, solid return on capital, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors and we point to slow historical revenue growth, and excessive margin volatility.
Volatility: Modest
In normal market circumstances, TCEHY is as volatile as an index. Put differently, without outstanding market volatility or shocking company news, the stock's price will move with the index. The stock's losses on its worst days (less than 1-5% of the time) will range from limited to average.
Stress-test: Resilient
In highly turbulent market conditions, TCEHY is not overly volatile. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low.
Selling difficulty: Low
TCEHY boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. However, under highly turbulent market conditions, the trading volume tends to improve significantly.
Country risk: Low
The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.
Other risks: Negligible
No other major risks have been identified.