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Tencent Holding - Equity Analysis

General analysis 



Company Description 

Tencent was founded by Pony Ma, Zhang Zhidong, Xu Chenye,  Charles Chen and Zeng Liqing in November 1998 as Tencent Inc, in the Cayman Islands. Tencent holdings Ltd. Is a Chinese multinational technology conglomerate and holding company headquartered in Shenzhen. It is one of the highest grossing multimedia companies in the world based on revenue. It is also the world’s largest company in the video game industry based on its equity investments, with Tencent Games being the subdivision of Tencent Interactive Entertainment Group (IEG) focused on publishing of games. 


Its services include social networks, music, web portals, e-commerce, mobile games, internet services, payment systems, smartphones, and multiplayer online games. It operates the instant messengers Tencent QQ and WeChat, and It also owns Tencent Music. 

Tencent has stakes in over 600 companies and began focusing on tech start-ups in Asia in 2017. 

TechCrunch characterized Tencent's investment strategy as letting its portfolio startups operate autonomously. Tencent's valuation approached US$1 trillion in January 2021 before it plummeted. 





Products And Services: 


Social Media 

Launched in February 1999, Tencent QQ is Tencent's first and most notable product, it’s one of the most popular instant messaging platforms in its home market. In 2005, Tencent launched Qzone, a social networking/blogging service integrated within QQ. Qzone has become one of the largest social networking services in China, with a user base of 645 million in 2014. WeChat is a mobile app with voice- and text messaging and a timeline. It is the most popular social mobile application in China and some overseas Chinese communities, for instance, Malaysia. As of 2017, WeChat has been unsuccessful in penetrating major international markets outside of China.  




Video Games 

Tencent publishes video games via its Tencent Games division of Tencent Interactive Entertainment. It has five internal studio groups under it: TiMi Studio Group, Lightspeed Studios, Aurora Studio Group, Morefun Studio and Next Studio. Outside of companies subsidiary of its game division, Tencent as a whole has many major and minor investments in domestic and, since the 2010s, foreign game companies. 


Television And Cinema 

In April 2009, Tencent launched iTQQ, a "smart interactive television service" in a joint effort with TCL.  

In 2015, Tencent launched Tencent Pictures, a film distributor and a production company that creates and distributes films based on books, comic books, animated series and video games. In the same year, Tencent launched Tencent Penguin Pictures a production unit focusing on online dramas and minor investments in feature films. It is under the Online Media Business Unit at Tencent and works closely with Tencent Video. 



On 21 March 2012, Tencent launched Tencent Comic, and would later become China's largest online animation platform. In September 2017, Tencent has announced plans to introduce Chinese online comics to every market around the world, with the first being North America. It will be working with San Francisco-based digital publisher Tapas Media, a partnership that will see English-language releases of several popular online Chinese titles. 


Video Streaming 

In June 2011, Tencent launched Tencent Video, a video streaming website. It also controls the live-streaming platform Huya Live and has stakes in other major Chinese game live-streaming platform operators, including DouYu, Kuaishou and Bilibili. In March 2020, Tencent started testing Trovo Live, a live-streaming service for worldwide users. Since June 2020, it owns the Malaysian Video-on-demand service Iflix. 


Virtual Reality 

In December 2022, Jia Wang, deputy director of the Technology Service Center at Tencent's office in Palo Alto, California, spoke with WIPO Magazine about the impact of technologies such as augmented reality, virtual reality, and artificial intelligence on the industry, highlighting the importance of Intellectual property protection to ensure that developers can make a return on their investments and continue to innovate. 



Tencent was reported in 2017 to be working with China's Central Bank to develop a central payment clearing platform for online payments.  

On 31 December 2021, it was reported Tencent had bought a stake in the UK digital bank, Monzo. 


Utility Software 

In 2017, Tencent launched its own credit score system called Tencent Credit, with a process like Sesame Credit, operated by its competitor, the Alibaba Group, through its subsidiary Ant Financial. 




Industry Overview and Competitive Positioning 

Tencent, a globally renowned internet and technology conglomerate, is known for its commitment to developing innovative products and services aimed at enhancing the quality of life worldwide. 

In recent years, the operational landscape for Chinese enterprises has been challenging, characterized by persistent COVID-19 pandemic-related disruptions, heightened regulatory scrutiny affecting major corporations, and other adverse conditions, which have exerted downward pressure on the growth trajectory of entities such as Tencent Holdings Limited (TCEHY 0.94%). 

Despite this issue, we expect sustained long-term growth for Tencent, and the two key factors underpinning its capacity to perpetuate its growth momentum merit attention. 

Tencent has adopted a strategic approach like that of a discerning stock investor, strategically acquiring minority stakes in growth enterprises like Snap and Tesla.  

Tencent also has not limited itself to public companies, in fact it holds huge stakes in private companies like EPIC games, evoking parallels with the modus operandi of distinguished investor Warren Buffett within the technology domain. 

Consequently, as these investee companies prosper, the value of Tencent's equity interests in these enterprises naturally grows. As a matter of fact, Tencent's investment portfolio exploded from 13 billion yuan in 2012 to 820 billion yuan by 2022, underscoring the potency of its investment strategy. 


TCEHY has a low value based on its Price-To-Earnings Ratio (11.7x) compared to the Internet and Tecnology industry average (34.31x), and that is because Tencent Holdings has numerous business and it cannot be compared only with the Tecnology sector. Let’s analyze now Tencent financial performance, with it dominating competitors when it comes to operating statistics. The company's LTM EBITDA margin of 15.7x is well above the one of its direct competitors : BIDU 5.1x, NTES 13.8X, MOMO 2.9x.  

On the other and Tencent LTM gross margin of 46.3% is slightly lower than its competition that have on average 50.5%. These margins have allowed TCEHY to generate a net income to Stockholder margin of 32.5%, which is again higher than its direct competition of 26.3% (NTES).  We present now the evolution of LTM Gross margin over the year for Tencent Holdings Inc. 



We report also the evolution of Net income to Stockholders margin, from December 2014 to December 2022: 



While NetEase, Inc (NTES) emerges as Tencent's closest competitor in operational metrics, showing a respectable LTM gross margin of 58.5% and EBITDA margin of 13.8x, it falls short across various metrics åcompared to Tencent. Other notable competitors include Hello Group Inc. (MOMO), Baidu Inc (BIDU), and Meiutan (3690.HK), all of whom trail behind Tencent in operational performance. 

Given its robust growth trajectory and minimal debt burden, TCEHY is poised to capitalize on numerous growth avenues. Potential avenues include expansion into untapped markets through strategic acquisitions, as well as leveraging consumer preferences favoring environmentally sustainable products, indicative of Tencent's agility and strategic foresight in navigating the evolving business landscape. 


Financial Analisys 

In this portion of the analysis, we'll undertake a thorough evaluation of Tencent Holdings Ltd.'s financial statements and performance indicators. Through this detailed review, we aim to quantify the company's past and present performance, allowing us to gather valuable insights into its future prospects and investment opportunities. 


Optimistic Outlook for TCEHY 


Sector Growth 

For the same reason said before it’s not possible to restrain Tencent Holdings Inc to only one sector. For this reason we present the forecast of growth of the main sector Tencent operates in: 

we start with the main one, the Global E-Commerce Platforms Market in terms of revenue was estimated to be worth USD 6.8 Bn in 2023 and is poised to reach USD 21.0 Bn by 2032, growing at a CAGR of 13.7% from 2023 to 2032. 

Cloud Computing Market Analysis. The Cloud Computing Market size is estimated at USD 0.68 trillion in 2024, and is expected to reach USD 1.44 trillion by 2029, growing at a CAGR of 16.40% during the forecast period (2024-2029). 

Key Highlights. The global online entertainment market was valued at USD 268 billion in 2021 and is estimated to reach an expected value of USD 1490 billion by 2030, registering a CAGR of 21% during the forecast period (2022 – 2030). 

So, to sum it up, we present the average of this different sector’s CAGR: 17,03% 


Company Growth 

TCEHY Earnings Forecast: 

Next quarter’s earnings estimate for TCEHY is $0.61 with a range of $0.56 to $0.68. The previous quarter’s EPS was $0.64. TCEHY beat its EPS estimate 50.00% of the time in the past 12 months, while its overall industry beat the EPS estimate 54.68% of the time in the same period. In the last calendar year TCEHY has Underperformed its overall industry. 

TCEHY Sales Forecast: 

Next quarter’s sales forecast for TCEHY is $21.84B with a range of $21.42B to $22.61B. The previous quarter’s sales results were $21.34B. TCEHY beat its sales estimates 50.00% of the time in past 12 months, while its overall industry beat sales estimates 58.70% of the time in the same period. In the last calendar year TCEHY has Underperformed its overall industry. 


Company Debt Payments 

Fitch Ratings has affirmed China-based Tencent Holdings Limited's Long-Term Foreign-Currency Issuer Default Rating and senior unsecured rating at 'A+'. The Outlook is Stable. The agency has also affirmed the company's outstanding senior unsecured notes and its USD30 billion global medium-term note programme at 'A+'. 

The affirmation reflects our expectations that Tencent will continue to maintain its strong business profile and manage its regulatory risk well. We expect a full recovery in profitability and cash generation from 2023, driven by steady revenue growth, structurally improved margins, continuous cost-optimisation measures and disciplined investment spending. 

Tencent's generous shareholder return policy and higher US dollar-denominated debt will slow the improvement in its gross leverage, but we expect it to maintain its net cash position. 


Financial Metrics 



Liquidity denotes the degree of ease with which an asset can be promptly purchased or sold in the market without triggering substantial fluctuations in its price. Put simply, it determines how effortlessly an asset can be transformed into cash without affecting its worth.  

High liquidity implies that an asset can be rapidly converted into cash, whereas low liquidity suggests the contrary. 

Here are some essential ratios utilized to assess liquidity: 


Current ratio = Current Assets / Current Liabilities = 1.30 

The current ratio is a financial metric used to evaluate a company's short-term liquidity, specifically its ability to pay off its short-term liabilities with its short-term assets. It's calculated by dividing a company's current assets by its current liabilities. A current ratio of 1.30 means that for every dollar of current liabilities, the company has $1.30 of current assets. This suggests that the company has a reasonable amount of liquidity to cover its short-term obligations. Typically, a current ratio above 1 indicates that a company has more current assets than current liabilities, which is considered a positive sign of liquidity.  


Quick ratio = (Current Assets - Inventory) / Current Liabilities = 1.30 

The quick ratio, also known as the acid-test ratio, is a financial metric used to evaluate a company's short-term liquidity and its ability to meet immediate financial obligations without relying on the sale of inventory.  

It's a more stringent measure of liquidity compared to the current ratio because it excludes inventory from current assets. This is because inventory may not be as readily convertible to cash in the short term, especially if market conditions change or if the inventory is specialized or slow-moving. 

A quick ratio of 1.3 means that for every dollar of current liabilities, the company has $1.30 of quick assets (current assets excluding inventory). This suggests that the company has a reasonable level of liquidity to cover its short-term liabilities without relying heavily on inventory sales. 


Cash Ratio = Cash and Cash Equivalents / Current Liabilities = 0.67 

The cash ratio is a financial metric that measures a company's ability to cover its short-term liabilities using only its cash and cash equivalents. It's one of the most conservative liquidity ratios because it excludes other current assets such as accounts receivable and inventory, focusing solely on the most liquid assets. 

A cash ratio of 0.67 indicates that for every dollar of current liabilities, the company has $0.67 of cash and cash equivalents readily available to cover those obligations. In other words, the company's cash reserves may be able to cover approximately 67% of its short-term liabilities. 

A cash ratio below 1 suggests the company may not have enough cash to cover all its short-term liabilities. This could indicate potential liquidity challenges if the company faces unexpected expenses or cash outflows. 



Profitability stands as a pivotal measure gauging a company's capacity to produce earnings in comparison to its expenditures and pertinent costs. It serves as a vital component of financial assessment, offering valuable perspectives into a company's general financial well-being and operational effectiveness. 


ROE = Net Income / Shareholders' Equity = 0.27 

ROE stands for Return on Equity, which is a financial ratio that measures the profitability of a company in relation to its shareholders' equity. It is calculated by dividing net income by shareholders' equity. A ROE of 0.27, or 27%, indicates that for every dollar of equity invested by shareholders, the company generated 27 cents of net income. 


ROIC = Net Operating Profit After Taxes (NOPAT) / Invested Capital = 0.096 

ROIC stands for Return on Invested Capital. It is a financial metric that measures a company's ability to generate profits from its invested capital. In general, a ROIC of 0.96 may not be considered particularly high. Typically, investors seek ROIC figures that exceed the company's cost of capital and are higher than the industry average. 

If a company's ROIC is consistently below its cost of capital, it may indicate inefficiency in capital utilization or poor operational performance. Conversely, if ROIC exceeds the cost of capital, it suggests that the company is generating value for its investors. 


Net Profit Margin = Net Income / Net Revenue = 0.325 

Net profit margin is a financial ratio that measures the percentage of revenue that translates into net profit after accounting for all expenses, taxes, and interest. It is one of the key profitability metrics used by investors and analysts to evaluate a company's financial performance. 

In summary, a net profit margin of 0.325 reflects positively on your firm's ability to convert revenue into profit, signaling good financial health and operational efficiency. 


Financial Leverage 


Debt Ratio = Total Debt / Total Assets This ratio reveals the extent to which a company's assets are supported by debt financing. A higher debt ratio signifies greater financial risk, as it indicates a larger share of the company's assets is backed by debt. With a debt ratio of 22.76%, it implies that only 22.76% of TCEHY's total assets are financed through debt. This is typically regarded favorably, suggesting that the company relies less on debt to sustain its assets, thereby mitigating financial risk. 


Debt Equity Ratio = Total Debt / Shareholders' Equity 

This ratio measures the relative contribution of creditors and shareholders to the company's financing. A higher debt equity ratio suggests higher financial leverage and, therefore, higher risk, as it implies a larger portion of the company's funding comes from debt rather than equity. A debt equity ratio of 49.78% means that 49.78% of TCEHY's financing comes from debt, while the remaining 50.22% comes from equity. This indicates that TCEHY has a medium equity stake in its capital structure, which is a good sign as it signifies average financial leverage and reduced risk. 

Total Debt to Capitalization = Total Debt / (Total Debt + Shareholders' Equity) 

This ratio illustrates the portion of a company's capitalization comprised of debt, providing insight into its reliance on debt for financing operations. A higher ratio signifies greater dependence on debt for funding. With a total debt to capitalization ratio of 33.24%, it means that 33.24% of TCEHY's total capitalization is derived from debt. A lower ratio is generally viewed favorably, indicating reduced reliance on debt for capital.  

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense 

This ratio evaluates a company's capacity to fulfill its interest obligations on outstanding debt. A higher interest coverage ratio implies a reduced risk of default, as it signifies that the company is generating ample earnings to cover its interest expenses. With an interest coverage ratio of 2,205%, it indicates that TCEHY's earnings exceed its interest expenses by 2,205%. This robust indicator suggests that the company maintains a substantial buffer to meet its interest obligations comfortably.  

Cash Flow to Debt Ratio = Operating Cash Flow / Total Debt 

This ratio gauges a company's capacity to produce adequate cash flow for meeting its overall debt commitments. A higher ratio signifies a superior capability to service debt using its operational cash flow, reflecting financial resilience. With a ratio of 40.68%, it suggests that TCEHY generates cash flow exceeding twice the required amount to cover its debt obligations. This highly favorable indication underscores robust financial well-being and the ability to effortlessly handle debt. 


DCF Model 

The Discounted Cash Flow (DCF) model represents a foundational framework within financial analysis employed to ascertain the intrinsic value of a company, this analysis is used to evaluate an investment by estimating its anticipated future cash flows. Its fundamental principle rests on the idea that the value of money declines over time due to factors like inflation and the opportunity cost of capital. This approach involves projecting future cash flows and then discounting them to their present value, aiming to ascertain the present value of a company's assets. At its core, the DCF model hinges on the belief that the intrinsic value of an investment lies in the present value of the cash it is expected to generate in the future. Unlevered Free Cash Flow serves as the driving force in this model, representing cash available for debt and equity holders. It is computed as EBIT minus taxes, plus depreciation and amortization, minus capital expenditures, and changes in net working capital. To compute the present value of a company utilizing the DCF model, we forecast future cash flows for a given company, taking into account parameters such as revenue growth, operating costs, capital investments, and tax considerations. These forecasts are subsequently discounted to their present value using the company's weighted average cost of capital (WACC). This metric gauges the average cost of capital for a company, factoring in the costs of both equity and debt capital, weighed by their respective proportions in the company's capital structure. 



Later we have calculated the revenue breakdown of Tencent Holdings in it’s various sectors, we present the graphic: 




We have used this data to forecast the revenue growth of Tencent Holdins Ltd, using an average of the annual CAGR of every sector that Tencent operates in, waited for the importance that that markets have for Tencent revenue. 








After calculating the enterprise value it’s possible to calculate the equity value by subtracting debt and adding cash. Following that, by dividing the equity value by the number of shares, we can compute the price per share. And comparing it to the one on the market we have concluded that the stock in question is undervalued by investors. 


Trading Comparables 

To establish a comparative analysis and gain a comprehensive overview, we've chosen companies by sectors, origins, sizes, offerings, and supplier relationships: BIDU, NTES, MOMO, 3690.HK 





Piotroski Score 

The Piotroski Score, invented by Joseph Piotroski, is a financial assessment tool that scrutinizes a company's financial strength using specific accounting and financial metrics. Its purpose is to pinpoint firms with strong fundamentals while steering clear of those with weaker financial standings. Piotroski introduced this scoring system in a research paper titled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers." Comprising nine criterias, each assigned a score of 0 or 1, the Piotroski Score ranges from 0 to 9, with a higher score indicating greater financial strength. 

The Piotroski Score encompasses the following categories: 

Profitability (1 point if the company has): 

  • Positive net income 

  • Positive return on assets (ROA) in the current year 

  • Positive operating cash flow in the current year 

  • Cash flow from operations surpassing net income (quality of earnings) 

Leverage, liquidity, and source of funds (1 point if the company has): 

  • Lower long-term debt in the current period compared to the previous years (decreased leverage) 

  • Higher current ratio this year compared to the previous year (enhanced liquidity) 

  • No new shares issued in the last year (avoids dilution) 

Operating efficiency (1 point if the company has): 

  • A higher gross margin compared to the previous year. 

  • A higher asset turnover ratio compared to the previous year. 

After assessing each criterion, their scores are summed to determine the overall Piotroski Score. A high score, close to 9, suggests stronger financial health, while a lower score may indicate potential financial vulnerabilities. 

Assessing Tencent Holdings ltd' financial factors as of September 2023 and analyzing its profitability, leverage, liquidity, and operational efficiency using the Piotroski Score framework: 


  • Positive net income of $27,220,000,000 

  • Positive return on assets (ROA) of 12.65% 

  • Positive operating cash flow of $20,452,740,000 

  • Cash flow from operations exceeding net income ($-5,901,280,000 > $1,281,280,000) 

Leverage, liquidity, and source of funds: 

  • Higher long-term debt in the current period compared to the previous year ($43,632,861,000 > $46,413,000,000) 

  • Higher current ratio this year compared to the previous year (1.984 > 2.209 as of 30/09/2023) 

  • New shares issued in the last year 9,612,396 

Operating efficiency:  

  • Higher gross margin compared to the previous year (43.1% > 46.3% as of 30/09/2023) 

  • Higher asset turnover ratio compared to the previous year (0.35 >0.39  as of 30/09/2023) 

In conclusion, based on the Piotroski Score analysis for Hudson Technologies, the company receives a score of 8 out of 9 on the Piotroski scale. This outcome suggests that Hudson Technologies does not face significant financial challenges or weaknesses in its current financial health. 



To summarize, following our analysis, we believe that Tencent is undervalued by the market; indeed, it is possible to see through the Piotroski score that the company in question is a solid entity and that all this distrust and decline in Tencent's stock price in recent years is not fully justified. 


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