Tencent Holdings:In line,Mobile gaming,Payments and Cloud drive growth;Buy

Tencent reported in-line 4Q16 non-GAAP EPS of Rmb1.298 (+37% yoy) onnet revenues of Rmb43.86bn (+44% yoy). Advertising, video subscription,cloud and payment revenues were above GSe, but growth trend in gamingslowed into 4Q. Margins were under pressure on higher content spending,and lower profitability of both payments and cloud services.

1) Online Gaming revenue grew 22% yoy (35% in 3Q) to Rmb22.5bn onmobile growth of 51% yoy (+87% in 3Q, Netease +83%) and PC growth of4%. a) Mobile paying gamers grew 91% while ARPU contracted 21% yoy.

On desktop, League of Legends (LoL) grew 16% yoy (in 2016), and remainsthe world’s largest PC game. b) Mobile games: Honour of Kings continuedto break usage records by attracting record audiences. In 2017, Tencent isconfident new game launches are of the right mix to deepen penetration inspecific verticals. Firm noted that competitive risk from Niantic/Blizzard hasebbed gradually, and Supercell’s Clash Royale has re-scaled charts in US.

2) Advertising revenue grew 45% yoy (vs. 51% in 3Q) to Rmb8.3bn. P4Prevenue was 77% higher and offset the slowdown in brand ad rev growth(+11%, from 21% in 3Q). a) Weixin’s Moments and Official Accountsremains largest ad rev contributor and the Moments advertiser doubled inthe past 4 months on launch of neighborhood ads. b) Video: Seasonalityand competition have driven up content spending in 2H16. 3) Other rev+289% yoy on continued payment/cloud growth. Company intends tofurther expand its ecosystem through “Connection” strategy in 2017.

We revise 2017E/18E EPS by -8%/-2%; introduce 2019E. 12m TP (based on28X 2018E EPS) is down 2% to HK$248. Maintain Buy. Key risks: Slowergaming growth, competition in P4P ad.