Update Report: Tencent(HK:0700), 98% 5-yr Upside(Toby LUO, CC VIP)
Toby LUO presents a "BUY" recommendation for Tencent due to its potential in AI and astute capital allocation among Chinese public companies.
This is an update report on Tencent aim to buy its share for 10% of total NAV of VIP CC’s portfolio after its drawdown following Trump’s tariff hike.
Thesis 1: One of the potential winners in the AI era. Same as META, Tencent is in a favorable position in the fierce competition to gain users and monetize AI products. Tencent is a latecomer in the AI competition, released its AI product Yuanbao several quarter later than BABA’s Qwen and ByteDance’s Doubao. However, following the release of Deepseek R1, Tencent quickly integrates the powerful open-source LLM into Yuanbao and WeChat search. WeChat’s huge user base (800mn MAU) and high-quality contents on Public Account (公众号) quickly helps Yuanbao became one of the most popular AI chatbot. Though Tencent’s own LLM lags behind BABA and ByteDance, utilizing the open-sourced model shall yield similar user satisfaction since leading models’ capabilities are quickly approaching each other.
Thesis 2: Finest capital allocation among Chinese public companies. Tencent has a consistent good track record of shareholder return. In 2024, it repurchased shares worth HK$112bn and distributed HK$3.4 of dividend per share (total HK$34bn), which exceeds its net profit and making total shareholder return 3.4% of its current market value. Its investment department is also good at investing in compounders (e.g., JD, Meituan and PDD) and delivering Tencent’s large public equity investment at the proper intrinsic value and uses market sentiment for the right time of exit (e.g., liquidated EastBuy when its streaming e-commerce business lead to market rush).
Looking into 2025, Tencent is likely to deliver a 10-15% growth in net profit from operation and 30bn investment return, making the total net profit RMB230bn, while returning HK$120bn to shareholders through dividend & buyback. This means a favorable 18x forward P/E ratio and 2.8% of shareholder return. Applying a 33x forward P/E ratio implies 98% favorable 5-yr upside for the company and its shareholder return provides good downside protection.