Is Tencent still worth HK$597 a share in light of WeChat ban?

Chinese internet and technology behemoth Tencent Holdings (HKG: 0700) is scheduled to report results for the second quarter of fiscal 2020 after market close on Wednesday 12 August 2020.

Below, we highlight three key considerations that investors should pay attention to ahead of Tencent’s upcoming earnings report.

Tencent stock plunged 10% after WeChat ban

Things are not looking so hot right now for the Tencent stock, with US President Donald Trump signing two new executive orders that will prohibit all US residents from engaging in any form of transactions with Tencent’s WeChat app (alongside ByteDance’s TikTok) starting from end-September 2020.

Following that, Tencent’s share price plummeted as much as 10% to a five-week low of HK$499.40 in morning trading on Friday 07 August 2020.

‘To protect our nation, I took action to address the threat posed by one mobile application, TikTok. Further action is needed to address a similar threat posed by another mobile application, WeChat,’ Trump said of the move, citing potential threats to US national security and citizen data.

The order, according to reports, would effectively ban WeChat – Tencent’s most profitable and widely used app – in the US.

Bloomberg Intelligence analysts Vey-Sern Ling and Matthew Kanterman calculated that Tencent has at least US$22 billion worth of gaming investments in the US that could be at risk of forced divestment, if the presidential executive order banning WeChat broadens to other assets.

On a month-to-month perspective, Tencent’s share price has risen over 30% since the start of June 2020, barring this latest drop. Prices remained lifted for the better part of July, moving sideways along the HK$510 to HK$560 band.

The stock was even able to surpass Alibaba Group Holding as Asia’s most valuable company on 23 June 2020, as well as Facebook as the world’s most valuable social media company on 29 July 2020.

Analyst rate Tencent ‘buy’ with target price of HK$570

Across the board, Tencent currently has consensus rating of ’buy’ from 52 out of 56 brokers, based on data compiled by Bloomberg.

The stock has also received an average 12-month price target of HK$570.37 (US$73.59) per share on Bloomberg. This represents an upside of roughly 11% from the last traded price.

Despite the US executive order on WeChat, analysts from three brokerage firms, namely Bernstein, New Street Research and Credit Suisse – reiterated their price targets of HK$650, HK$615 and HK$641 respectively.

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Last week, IG market strategist Pan Jingyi wrote that Tencent shares has rallied strongly since March 2020, breaking above the HK$515 resistance level into the start of July.

Having said that, she noted that prices appeared to have entered a short-term consolidation zone of between HK$515 and around HK$560.

‘Watch for a firm breakout above the latter to open further upsides in the current trend. A break below HK$515.00 may, however, mark a definite pause in momentum here, although the prices could stall ahead of the Q2 earnings release,’ she concluded.

Meanwhile, Morningstar equity analyst Chelsey Tam on 13 July 2020 gave the stock a fair value price estimate of HK$597, citing Tencent’s ongoing transformation from a consumer internet company to an industrial digital specialist as a price catalyst.

‘We think Tencent has put more of the focus on cloud and advertising businesses following its reorganisation. The cloud and smart industries group has been created as a stand-alone segment for the cloud business and enterprise-facing services such as smart retail,’ she wrote.

On top of that, Tam also noted how the advertising and sales department had merged with the social and performance advertising department to form a new advertising and marketing services business segment under the corporate and development group.

She believes that the new set-up can provide advertisers with integrated advertising solutions and more unified user insights.

Based on Thursday 06 August 2020’s closing price HK$553.50, the Tencent stock has a trailing price-to-earnings ratio of 51.53x, which is above its five-year average of 40.07.

Tencent best sales estimates in the last two quarters

Analysts polled by FactSet have given a consensus earnings per share (EPS) estimate of 3.85 Chinese yuan (US$0.55) alongside expected revenues of between 106.5 billion yuan (US$15.3 billion) and 121.8 billion yuan (US$17.5 billion) for the tech giant’s Q2 2020.

Meanwhile, 23 brokers polled by Bloomberg have projected average sales of 112.46 billion yuan (US$16.2 billion) and GAAP EPS of 2.82 yuan (US$0.41).

Tencent itself has not given any specific forecast numbers, but said in its Q1 2020 update that it expects in-game consumption activities to largely normalise as people return to work. However, it also foresees some headwinds for the online advertising industry.

For shareholders and prospective investors alike, it is probably also worth noting that the company surpassed Bloomberg consensus revenue projections in its last two reporting quarters.

Revenue for Q1 2020 came in at 108.1 billion yuan (versus an estimate of 101.1 billion yuan), while revenue for Q4 2019 came in at 105.77 billion yuan (against an estimate of 103.66 billion yuan).

On the other hand, GAAP EPS surpassed estimates in Q1 of 2020 by nearly 29%, but missed targets in the last quarter of 2019 slightly by 2.34%.

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