Tencent delivered upbeat 2Q20 results, with revenue/adj. net profit +29% YoY/+28% YoY, 2%/3% above consensus. Mobile game momentum continued, with 62% YoY growth. We keep bullish on its mobile game momentum with globalization and upcoming strong pipeline. We expect limited impact from US ban on Wechat (< 2%) and mobile DNF delay. We raised its EPS by 6%/5%/5% in FY20/21/22E for stronger game, and lifted our TP to HK$624 from HK$500 (coupled with higher sector multiple and investment valuation). Maintain BUY.
- 2Q20 beat. 2Q20 revenue was RMB114.9bn, up 29% YoY, 2%/2% above consensus/our estimate, mainly on strong mobile games. Non-GAAP net profit grew 28% YoY to RMB30.2bn, 3%/1% above consensus/our estimate. We are impressed by its continuous game momentum (+40% YoY), and keep confident on its growth in 2H20E. US market contributes < 2% of total revenue per mgmt., suggesting minimal impact from US ban.
- Strong game to continue. Game surged 40% YoY in 2Q20 (vs. +31% in 1Q20), in which mobile game +62% YoY (higher than consensus of ~50% YoY), mainly driven by strong key titles (e.g. HoK, PUBG Mobile) and increasing overseas contribution. Despite mobile DNF delay, we keep positive on its game momentum in 2H20E (forecasting mobile game +45% YoY in 3Q20E), considering 1) overseas contribution and rising time spent due to global COVID-19; 2) deferred rev from solid key titles (deferred rev +68% YoY in 2Q20); and 3) new titles to bring further upside.
- Looking beyond soft 2Q20 ads. Ads slowed down to 13% YoY in 2Q20 (below consensus of 18%-20% YoY, vs. 32% in 1Q20). By segment, social ads/ media ads +27%/-25% YoY (vs. +47% YoY/-10% YoY in 1Q20). The softer-than-expected ads was mainly due to weak brand ads demand amid challenging macro, delayed video content and game S&M normalization. However, we expect its 3Q20E ads to pick up, with popular drama series (e.g. Nothing but Thirty <三十而已>), and integrated ad platform.
- Maintain BUY. We raised its EPS by 6%/5%/5% in FY20/21/22E, and lifted our SOTP-based TP from HK$500 to HK$624. Our new TP is equivalent to 35x FY21E P/E. Tencent could be more defensive under COVID-19 impact, and we expect its strong mobile games, new initiatives expansion and mini-programs potential to unlock its secular growth.
