Tencent Holdings:4Q16preview,Gaming,ad and payment;end 2016on a strong note

What we expect

Tencent will announce 4Q16results on Wednesday, Mar 22nd after marketclose. We see evidence of another strong year, particularly on advertisingrevenue growth rate being higher than peers, and payments driving otherrevenues up 200% yoy. For 2017and beyond, we are focused on WeChatMini Program development, games pipeline and WeChat ad load. Weforecast revenue of Rmb 44,588mn and EPS of Rmb 1.30for 4Q16.

What could surprise us

Online gaming: We expect online gaming revenue to grow 37% yoy in4Q16, driven by 81% yoy growth in mobile gaming revenue and 9% yoygrowth in PC gaming revenue. Mobile game Honour of Kings deliveredstrong performance in 4Q16, with daily active users (DAU) surpassing50mn in Dec 2016, higher than Pokémon Go’s peak in July 2016perBloomberg report. We saw favorable development for League of Legends,as the threat from Overwatch is receding, and data from SuperdataResearch indicates 16% yoy revenue growth in 2016. Online advertising:

We forecast online advertising revenue to grow 44% yoy in 4Q16,outpacing China Internet peers’ 21% yoy growth rate, but down from51%/118% in 3Q16/4Q15due to continued revenue mix shift fromadvertising model to subscription model on online video. Other revenues:We forecast 200% yoy growth in Tencent’s other revenues line, driven bygrowth in payments (0.1% cash withdraw fee was introduced in Mar 2016,scenarios expansion) and cloud computing.

On Mar 22nd call, we expect management to discuss (i) development onWeChat Mini Program; (ii) Honour of Kings and new games pipeline; (iii)video content spending trend and WeChat Moment ad load. Our 12m TP ofHK$252.30is based on 28X 2018E EPS. Key risks: Macro slowdown,competition with Alibaba Group and other P4P advertising assets.