Tencent share price hits new high: where next amid coronavirus?

Chinese video gaming and digital entertainment mammoth Tencent Holdings Limited, with a market capitalisation of US$572 billion, is the second most valuable Asian company today.

This works out to a current valuation of HK$418 per share, an all-time high for the stock.

This valuation would have appeared unlikely only two weeks ago, when the stock had dipped by 2.66% to a two-month low of HK$373 per share, following the outbreak of the Wuhan coronavirus. However, it quickly rebounded in the subsequent two weeks, even surpassing its initial drop rate.

Since that low recorded on 31 January – a week out from the virus making global headlines, Tencent’s share price has soared as much as 12.5% to its current historic peak of US$419.80 per share.

Tencent share price primed for more growth

According to Morningstar Equity Analyst Chelsey Tam, the stock’s exponential growth looks certain to continue even amid all the health uncertainties.

She says gaming and digital entertainment companies like Tencent are in fact potential long-term beneficiaries of this uncertainty, and should see benefits outside of their bread-and-butter businesses because of faster adoption of its digital offerings.

That is because with more people staying home for the foreseeable future – or at least until the virus is contained, Tencent’s games, music, and online video segments, as well as its B2B business arms, are expected to do well.

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Gaming sector

A near-term boost is expected for Tencent Games’ earnings as a result of the epidemic, Tam posits.

According to Sensor Tower, Tencent’s PUBG mobile grossed HK$1.4 billion in January, up fourfold year-over-year, making it the highest-grossing game for the month. PUBG mobile includes the mainland version of ‘Peacekeeper Elite’, which accounted for 53% of total gross.

In particular, Tencent’s ‘Honor of Kings’ title was the first runner-up, with 1.2 billion Chinese yuan grossing, up 25% year-over-year. According to SINA news, Honor of Kings' grossing on Chinese New Year eve – on the cusp of the outbreak – was estimated to be two billion Chinese yuan, a 54% year-over-increase.

There are reports by Chinese news site 36kr of a surge in traffic in leisure games as well. On the other hand, according to the same website, gaming companies’ employees have expressed difficulty developing and adjusting games at home on schedule. Therefore, a prolonged outbreak is likely to still have some negative impact on new game launches.

Online video and music

There is no doubt that online video is also a major form of home entertainment, making the segment a clear beneficiary when people spend more time indoors.

‘We predict that online memberships could increase as a result, some of whom could be first-time subscribers. While some subscribers are expected to drop off after the epidemic is contained, we think some of them who never paid for online videos might stay if they enjoy the experience,’ says Tam.

Over Valentine’s Day (14 February), Tencent Video and Baidu’s video platform iQiyi also collaboratively broadcast Fei Long Guo Jiang—a film that was originally scheduled to be shown in cinemas that very day —for CNY 6 per view (non-member CNY 12 per view). The film is expected to generate a healthy amount of revenue and new subscriptions for Tencent Video.

Tencent subsidiary Tencent Music Entertainment should also benefit from increased participation in online karaoke and music-centric live-streaming services, Tam adds. These are under the social entertainment services segment, which is a key profit driver for Tencent Music Entertainment.

B2B offerings boosted by telecommuting

According to Morningstar, the outbreak has also led to the largest trial of some business-to-business (B2B) products, such as online office tools and cloud services. Remote work tools such as Tencent’s WeChat Enterprise crashed temporarily from the spike in traffic amid the outbreak.

During this time, WeChat Enterprise increased the number of participants in an online meeting to 300 people, a feature that can allow teachers to livestream online classes. Meanwhile, students can use WeChat to attend classes.

Tencent Documents also increased the capacity of participants filling out forms (which can be used to fill out health status for compiling statistics) to 7,000 individuals completely free-of-charge. Parents/employees can send these forms to the teachers via WeChat. Many office tools have been offered for free, but Morningstar predicts that this will accelerate the adoption of all Tencent B2B solutions across the board anyway.

On the back of these factors, Lum has given the Tencent stock a near-term share price target of US$460, and a ‘wide’ economic moat rating. A ‘wide’ economic moat means a company is likely to keep competitors at bay for an extended period of time.

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