UBS: Lowering Tencent Holdings (00700) Target Price to HK$740 to Reiterate “Buy” Rating

The Zhitong Finance App learned that UBS released a research report stating that it lowered the target price of Tencent Holdings (00700) by 3.9% from HK$770 to HK$740, reaffirming the “buy” rating. The bank expects Tencent's revenue to increase 7% in the third quarter, which is slower than growth in the second quarter. Adjusted net profit will decrease 7% year over year to 65 billion yuan (up 9% in the second quarter), mainly affected by artificial intelligence investment and a possible decrease in amortization of the share of joint venture profits.

The bank's business division predicts that in terms of games, growth in the domestic market is expected to slow to 12% in the third quarter due to a high base (17% increase in the second quarter); the international market is forecast to decrease by 3% due to weak Supercell's performance and limited number of new game releases in the third quarter. The advertising business is expected to grow by 18% quarterly. Affected by continuing macroeconomic adverse factors, the growth rate has slowed, and revenue from advertising technology upgrades, increased ad load on video accounts, and higher eCPM advertising formats (such as motivational ads and closed-loop ads) is being curtailed. Fintech is expected to remain stable, up 8% year over year, and payment business growth is weak, but cloud business growth has accelerated slightly as chip supply improves and WorkBuddy subscription revenue increases.

The bank pointed out that in terms of profit margin, the expected gross profit margin was 57.2%, an increase of 0.8 percentage points over the previous year, due to the inclination of the business structure towards high-margin businesses. Adjusted operating profit is predicted to decrease 2% year over year to 71 billion yuan due to increased depreciation and artificial intelligence operating expenses (UBS estimated at RMB 16 billion). Excluding investment in artificial intelligence, Tencent should continue to maintain the operating leverage effect. The adjusted operating profit growth rate is estimated at 13% (19% in the second quarter).