Tencent:3Q15results preview

Tencent will report 3Q15 results on Nov 10. We expect 3Q15 revenue to grow8% QoQ and 27% YoY to Rmb25bn on the back of major mobile gamelaunches and strong ads. Adjusted OPM should contract slightly from 46% in2Q15 to 42% in 3Q15 due to more promotion for mobile game launches andspending on mobile payments and O2O initiatives. Reiterate OP with a TP ofHK$197 based on SOTP valuation.

We expect a solid 3Q15. We forecast 3Q15 revenue to grow 8% QoQ and27% YoY to Rmb25bn, in line with consensus, on the back of major mobilegame launches and strong ads. We expect adjusted OPM will contract slightlyfrom 46% in 2Q15 to 42% in 3Q15 due to more promotion for mobile gamelaunches, spending on mobile payments and O2O initiatives. We expectadjusted net income to grow 2% QoQ and 27% YoY to Rmb8.1bn, in line withconsensus.

Faster mobile game launches and stable PC games. Tencent sped upmobile game launches in 3Q15 with the King of Fighters 98 UM and 9LZ inmid July, and the Legend of MIR 2 in August. Tencent now grabbed onaverage 2-4 titles in top 5 grossing games in 3Q15 in China vs 1-3 titles in2Q15. We thus forecast mobile game revenue to grow 13% QoQ to Rmb5bnin 3Q15. Concerning Tencent’s PC games, ACG held up in 3Q15 especiallywith LoL according to Baidu Index. MMOG, particularly B&S, continued thedowntrend as users shifted to ACG. We model 1% QoQ and 7% YoY growthin Tencent’s PC games in 3Q15, given the lack of any big game launch.

Ads continue strong momentum. Tencent’s video ads should fare betterthan peers who have suffered from a weak macro, given Tencent’s exclusivecontent including Voice of China 4 and NBA in 3Q15. iResearch’s online videotraffic data confirms this. Driven by Mobile Qzone and Weixin OfficialAccounts, performance-based ads continued to grow at a faster pace.

Deployment of Weixin Moment ads is still in the early phase. We expectonline ads revenue to grow 15% QoQ and 92% YoY to Rmb4.7bn.

Focus of the conference call. 1) PC and mobile game performance and thepipeline, 2) progress on Weixin Moment ads monetization, 3) overalllandscape of brand ads particularly video ads, and 4) O2O initiatives.