Tencent's Big Beat Falls Flat With Analysts Pining for New Games

(Bloomberg) -- Tencent Holdings Ltd.’s inability to offer clarity on new game approvals took the gloss off its better-than-expected third-quarter update.

The company’s management said late Wednesday it didn’t have much of an update on the games approval process that has been at the center of the stock’s more than $230 billion loss of value since January.

Here’s what analysts said:

JPMorgan Chase & Co.

• Price target cut to HK$345 from HK$400 and Tencent removed as top sector pick, writes analyst Alex Yao
• “Visibility on new game monetization approval, the single-most important swing factor of 2019 gaming revenue, remains as low as before the print” and the approval suspension seems more serious than initially thought
• Cautiously optimistic the approval process will resume by the end of 2019
• Expansion into industrial internet looks like a short-term pain point but a long-term gain; it could take years for financial returns to emerge
• Cuts 2019/2020 EPS targets by 11%/9%
• Prefers Alibaba among large caps on better control of earnings generation capability

Citigroup Inc.

• Price target cut to HK$392 from HK$420 and buy rating maintained, analysts including Alicia Yap write
• Near-term games revenue growth outlook “remains murky” as there is no sign of when approval will be resumed, and given the implementation of real-ID verification for Honour of Kings
• “Tencent’s recent reorganization upgrade and its latest strategic focus on industrial internet position it as a key digital assistant to industry partners, whereby it could create another internet empire surrounding enterprises and providing support to provincial and municipal services”
• Reduces 2019 adjusted EPS target to HK$11.50 from HK$13.10

Morgan Stanley

• Price target cut to HK$370 from HK$420, stay overweight; “we believe cautious forecasts are prudent given macro risk,” analysts including Grace Chen write
• Online game revenue was lower than expected, mainly due to weakness in PC game sales
• “VAS gross margin contracted to a record low of 56.5%, likely due to unfavorable product mix with softer-than-expected PC game sales”
• Online ad revenue was a highlight, driven by strength in the social and others segment, such as WeChat Moment, Mini Program and QQ KanDian
• Good 3Q figure for revenue from other businesses. Strength in that segment was driven by commercial payments, fintech services and cloud

Credit Suisse Group AG

• No new updates on game license approval, while recent measures regarding minors have limited impact, analyst Thomas Chong writes
• Still room for mobile games revenue growth through users, average revenue per user and paying ratio
• “Industrial internet is a long-term initiative with initial opportunities by gaining market share through cloud”
• Maintains outperform rating and price target of HK$411

China International Capital Corp.

• Short-term stock rebound on ads strength, but in the longer term, market will realize PC weakness outweighs strength in ads/other revenue, analyst Natalie Yue Wu writes
• Turbulence related to gaming monetization approval to continue into mid-2019
• Games revenue missed consensus and PC game revenue may remain under pressure in 4Q, given Nexon’s weak China guidance
• Maintains buy rating and price target of HK$365

Jefferies Group LLC

• Results “better than feared,” as sequential recovery in mobile games and re-accelerating ad growth offset PC games weakness, write analysts including Karen Chan
• Clarity on game approval timeline remains low, but 15 approved games in pipeline should provide a buffer of 2-3 quarters
• Cloud and mini programs show long-term monetization potential
• Maintain buy rating and HK$385 price target

Tencent was up 3.4 percent at HK$281.40 at 9:58 a.m. in Hong Kong, leading gains on the Hang Seng Index. The stock is still down 31 percent this year.

--With assistance from David Watkins.

To contact the reporter on this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Ryan Lovdahl, Will Davies

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