2023-06-28 05:08:37 ET
Summary
- Tencent, the largest online gaming company in China and a major fintech player, is undervalued, according to my analysis. The company's games have significant staying power and its Mini Programs generated several trillions RMB of GMV in 2022.
- I value Tencent at $487 to $515 billion, factoring in its investments, operating businesses, and efficacy of deploying earnings. This is higher than the current market cap of $421 billion, suggesting the stock is a buy for long-term investors.
- I also emphasize the importance of Tencent in the world's second-largest market, China, and suggest that the company's size and influence make it too significant to be ignored by investors.
Introduction
As my January 2023 article says, people in China essentially live on WeChat. In addition, Tencent is the dominant online gaming company in China. Also, Tencent is an enormous fintech company. Tencent is one of the most important companies in the world's second largest market. My thesis is that Tencent ( OTCPK:TCEHY ) is too big to be ignored.
At the time of this writing, 1 RMB is about $0.14.
The Numbers
Tencent is by far the largest online gaming company in China. An April 2023 article from the FT by Eleanor Olcott and Qianer Liu shows Tencent's top games being responsible for more than 1/3rd of the market in China. Honor of Kings stands well above everything else:
In the 1Q23 call , Alicia Yap from Citigroup asked about old games regaining popularity. Senior Executive VP James Mitchell made it clear that he believes many of their games have tremendous staying power which can last for decades:
So on the game business, not to be pedantic, but we feel very strongly that what you referred to as old games are, in fact, evergreen games. And if you look at our game portfolio, many of the biggest, most successful titles, including Honor of Kings, League of Legends, CrossFire Mobile, Peacekeeper Elite, PUBG Mobile, Arena Breakout competitive games, often team-based competitive games that are designed to be balanced, fair and playable for years or for decades.
Per the May 2023 corporate overview , Mini Programs generated several trillions RMB of GMV in 2022:
Visual Capitalist shows the importance of China's GDP with respect to the global economy:
Valuation
The value of the listed investments portfolio has decreased due to market conditions and distributions. The 2022 annual report says ??the amount of dividends payable for distribution in Meituan is about RMB 148.0 billion and the JD.com amount is about RMB 17.1 billion. Adding these together and converting to USD gives us a figure of about $23 billion:
The May 2023 corporate overview shows the sum of listed and unlisted investments as $117 billion as of March 31st:
The May 2023 corporate overview shows TTM free cash flow ("FCF") of RMB 125 billion:
This TTM FCF translates to about $17.5 billion. I think the operating businesses are worth 20 to 21x TTM FCF which is $350 to $368 billion.
I value Tencent as follows:
$117 billion investments
$350 to $368 billion operating businesses
$20 to $30 billion efficacy of deploying earnings
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$487 to $515 billion total
The 1Q23 announcement shows 9,657 million weighted average shares for the calculation of diluted EPS. Multiplying this by the June 27th ADR price of $43.57 gives us a market cap of $421 billion. The market cap is less than my valuation range so I think the stock is a buy for long-term investors.
Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.
For further details see:
Tencent: Not To Be Ignored