Tencent hits new high as Morgan Stanley raises price target on stock

Tencent will report third-quarter results on November 15, with Morgan Stanley expecting record-high revenues for the internet giant from its games portfolio

PUBLISHED : Friday, 03 November, 2017, 2:15pm
UPDATED : Friday, 03 November, 2017, 11:34pm

Tencent hit a new all-time high of HK$368.4 on Friday, after Morgan Stanley raised the stock’s 12-month price target to HK$420, up 14 per cent from its previous estimate.

Tencent closed at HK$368, paring some early gains, but still up 1.7 per cent from the previous session. It extended its winning streak to a sixth straight session. The stock has soared 94 per cent so far this year.

Morgan Stanley is staying overweight on the stock and estimates the Chinese internet giant will post record game revenues in the third quarter, buoyed by the continuing momentum in the world’s top-grossing mobile game Honour of Kings.

The bank’s previous 12-month forecast for the stock was HK$370.

“We expect Tencent to see another record-high quarter in games, driven by continued momentum in Honour of Kings as well as other key legacy titles,” Grace Chen, Elaine Zhang, and Alex Ko, analysts for Morgan Stanley, said in a research note on Friday.

The advertising segment is also likely to help the company post a solid quarter.

Total game revenue for the third quarter could grow 40 per cent year on year, with mobile games reaching another historical high of 17 billion yuan.

‘This is my daughter, Honour of Kings’: 5 times China’s mobile gaming obsession got out of hand

Honour of Kings continued to outperform during the third quarter, with favourable seasonality and various promotional events driving up user engagement and spending,” the analysts said.

According to US app analytics service provide Sensor Tower, revenue from Honour of Kings on the iOS platform was up 30 per cent on a quarterly basis during the July to September period, versus 24 per cent quarter on quarter growth in the April to June period.

Honour of Kings became the world’s most profitable game across all platforms in May, according to SuperData Research. The game had over 200 million registered users in 2016, Tencent said.

Another driver to Tencent’s revenues for last quarter could be advertising, Morgan Stanley analysts said. Ad revenues could reach 11.2 billion yuan in the third quarter, up 50 per cent from the same period a year ago.

For media advertising, the analysts expect Tencent’s investment in quality content to continue to drive up traffic and the time spent. For social and other advertising, the opportunities offered by the WeChat instant messaging platform will also serve as growth engines. WeChat is also known as Weixin in China.

For 2017, Tencent’s revenues could increase 53 per cent to 232.3 billion yuan (US$35 billion), driven partly by higher advertising income and greater fintech offerings, Morgan Stanley estimated.

The analysts also expect Tencent to recognise a one-time gain from its investments in ZhongAn Online this quarter.

ZhongAn Online, China’s first online-only insurer, debuted in Hong Kong on September 28, raising US$1.5 billion, marking the city’s biggest fintech listing so far. Tencent holds a 10.42 per cent stake in the firm.

Tencent is expected to release third-quarter results on November 15. Market consensus estimated its net profit at 15.6 billion yuan, up 46 per cent year on year, according to analysts polled by Bloomberg.

In the second quarter, Tencent posted a 70 per cent jump in net profit, blowing past market forecasts, thanks to the success of Honour of Kings.

Morgan Stanley rates a stock overweight when its total return is expected to exceed the average total return of the analyst’s industry coverage universe, on a risk-adjusted basis, over the next 12-18 months.

Currently, the target price estimates for Tencent by several investment banks are between HK$380 to HK$426, including Nomura and DBS.