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Growth Of Growth

19 November 2019 by jbchevrel

Tencent Holdings Limited (TENCNT) provides Internet and mobile value-added services (VAS), online advertising, and e-commerce transactions services to users worldwide. While those are the 3 segments, the former is the biggest one, representing about half of its revenue. Its portfolio of online games include League of Legends for PC, PlayerUnknown's Battlegrounds on mobile. The CDS is a constituent of the itraxx Asia Ex Japan since series s30 (included). After the market stress in China in early 2016, the 5y CDS of TENCNT has been keeping a range of [50bp , 100bp]. The 5y CDS is now back to the middle of this range, at ~75bp. TENCNT is (rightly) perceived as a strong-growth asset-light company. After the release of Q3-19 results, the sentiment on TENCNT has benefitted from an accelerated profit growth. But this has been offset by lower than exepcted revenue growth. (Almost) everything grows at TENCNT. That is expected. The devil is then in the 2nd derivative. In Q3-19, profit growth accelerated ~+25% (vs ~+20% in Q2-19 and in 2018), while revenue growth slew to ~+20% (vs ~+40% in 2018 ~+60% in 2017). Of the 3 segments, VAS revenue grew +15%y (online games +11% social networks +21% pushed by contributions from digital content services such as live streaming, video streaming subscriptions and music streaming services), FinTech and Business Services rev. grew +36%y (commercial payments grew thanks to increased a. daily active consumers b. number of transactions per user), Online Advertising rev. grew +13%y (mixed – strong growth from Weixin Moments but negative growth from media platforms including Tencent Video). While revenue growth in the slower parts of the business is worth watching, it is more a matter for equity than for credit at this level. TENCNT leverage is low. Both in absolute and compared to its peers Alibaba (BABA – in AXJ index since s30) and Baidu (BIDU – in AXJ index since s32), TENCNT holds a strong cash position of ~$28b vs ~$33b for BABA (5y CDS ~70bp / NB: upside potential if BABA gets ~$12b from its HK listing) and ~$20b for BIDU (5y CDS ~100bp). TENCNT total debt is higher than peers’. TENCNT ~$30b BABA ~$20b BIDU ~$10b. while their expected EBITDAs/FCFs for EOY-19 and 2020 are expected to be in the area of: TENCNT ~$20b/$15b BABA $25b/$20b BIDU ~$2b/$1b. TENCNT (75bp) thus has a net debt position while BABA (70bp) has net cash, and may have even more post HK listing, when it comes, if it comes. The 5y TENCNT/BABA spread has been stable (came from 0bp to 5bp over the past 1y).