Mainfrist /ChaoWang

Event

Tencent reported 1Q10 results

Analysis

–         1Q10 revenue increased by 69% YoY and 15% QoQ to RMB4.2bn, 4.6% higher than consensus. Net profit increased by 69% YoY and 18% QoQ to RMB1.78bn, inline with consensus. Gross margin was 68.6%, largely flat YoY and QoQ. Operating margin expanded by 4ppt QoQ and YoY, offset by higher forex loss and tax. Net margin was up 1ppt QoQ and flat YoY.

–         Online game was the biggest contributor in 1Q, up 91% YoY and 30% QoQ despite low seasonality, due to increased monetization. Proportion of online game increased to 48% compared to 42% last quarter. ARPU (including chess game) was around RMB50/mo in 1Q10, becoming harder to grow. Going forward, we expect game revenue to slow down, but still outperform industry avg.

–         Advertising increased by 39.4% YoY in 1Q10. Shanghai Expo and World Cup are both catalysts for ad revenue to accelerate this year.

–         According to Bloomberg consensus, Tencent is now trading at 32x 2010 PE, compared to Baidu’s 39x and Alibaba’s 46x. Consensus 2009-2012 CAGR for Tencent, Alibaba and Baidu is 18%, 47% and 23% respectively. We believe Tencent is being overlooked as the stickiest platform in China internet space. We expect the street will revise upwards their estimate on Tencent.