Moto issued a research report that the bank has recently communicated with the management of Tencent. Motors believes that the regulatory risks of game operations can be controlled, and the impact of the implementation of the personal Information Protection Law (PIPL) on Tencent is weaker than that of peer companies dominated by advertising business. The details are as follows:

Tencent management said that opening up more diversified services on other platforms, such as BABA, would benefit Tencent's ecosystem, but the guiding principle was to balance the product and user experience, and whether external operators were willing to abide by Tencent's rules. According to the relevant regulations, the platform should have the attribute of defending function. Management pointed out that the company has opened its platform to BABA's Taobaopiao and box horse fresh business.

For the implementation of PIPL, Tencent believes that this will be better than the long-term positive development of the industry, and the company can relatively better adapt to this change, as shown in: 1) the user agreement for data collection has been obtained on Tencent APP, 2) the proportion of advertising revenue is lower than that of peers (mainly advertising business), and 3) the company has adopted multiple firewalls to separate international and onshore data repositories to enhance data security.

In addition, Tencent has a large and diversified investment portfolio, and the company will deploy realized investment returns (rather than unrealized) to create a 100 billion yuan sustainable innovation and common prosperity fund. Motors said its earnings were much higher than expected and are expected to be more than $220 billion, which does not take into account the increase in the valuation of the listed shares.

The research newspaper continued that although Morgan Stanley expects Tencent's financial performance to weaken in the second half of this year, the bank still believes that its fundamentals are sound. In terms of games, although delays in the release of major games are not good for recent revenue, the content is basically ready; in terms of advertising, weakness in major advertising business categories and tighter regulation are likely to slow revenue growth in the second half of this year. Tencent's traffic, inventory and Wechat ecosystem remain strong. Motors believes that the key share price driver in the near term remains investor confidence in the regulatory environment in China's Internet sector. As a result, management said that "more regulation should be introduced in the near future" should strengthen investors' cautious view of the stock and the sector.

Morgan expects Tencent's share price to fluctuate in a range over the next quarter or two, but the bank expects earnings to accelerate in 2022, while a stable regulatory environment will boost the stock's performance over the next six to 12 months.

To sum up, Motors maintains Tencent's (00700) overweight rating, with a target price of HK $640.