Edited by Anxin Securities: "Tencent's third Quarterly report Prospect and valuation sensitivity Analysis"

Tencent's three-quarter report will be released on November 14, according to an announcement by the Hong Kong Stock Exchange. However, due to the "game regulatory clouds lingering, the outbreak of advertising revenue still takes time", the market expectations for Tencent is still low.

1. Core data: an overview of Tencent's three quarterly reports.

According to the Anxin Securities report, Tencent's third-quarter income is expected to rise 19.5 per cent year-on-year to 77.95 billion yuan, 4 per cent lower than Bloomberg expected; adjusted net profit rose 6 per cent year-on-year to 18.1 billion yuan, 7 per cent lower than Bloomberg consensus expectations, and adjusted net interest rate was 23 per cent.

To thisAnxin Securities said the reason is that there are low expectations for mobile games in the third quarter.Due to the World Cup and the unrealized Battle Royale Mobile Games occupies the user game time, reduces the mobile game income forecast.

2. Key business: TencentA brief Analysis of the performance in the third quarter

• Game revenue is roughly the same as the same period last year, with month-on-month seasonal growth.

Anxin Securities expects Tencent San.Quarterly game revenue is roughly flat compared with the same period last year.Quarterly revenue from the value-added services sector, including games, increased by 5% year-on-year to44.3 billion yuan, accounting for 57% of the total incomeOf which more than 70% are game revenue.

Of this total, revenue from mobile games increased by 3% over the same period last year, up 6% from the previous month to 18.6 billion yuan.The growth momentum of the month-on-month comparison mainly comes from the new tour "my name is MT4", "Free Fantasy", "Saint Seiya" and so on. As Battle Royale Mobile Games has not yet realized, the impact of the increase in its active users on the duration of use of other game products continues; at the same time, it is expected that the income performance of "Arena of Valor" may be affected to some extent by the World Cup and may rebound normally thereafter.

In addition, the forecast for PC games in the third quarter was 6% lower than the same period last year, an increase of 6% from the previous month to 13.7 billion yuan.The year-on-year decline was mainly due to the high base of LOL and the impact of chicken-eating games in the same period last year.

• Social advertising has a large cash space and a long front.

Anxin Securities believes that there is room for long-term growth in the realization of advertisements based on social flow, but the process is long-term and cautious.Advertising revenue is expected to increase 39% year-on-year to 15.3 billion yuan in the third quarter, driven by 52% year-on-year growth in social advertising.It mainly comes from:

1) up to two advertisements per day in momentsFrom a first-tier city to a low-tier cityStep by step implementation

2) other social resourcesAn increase in advertising space；

3）Loading rate and improvement of ECPM；

4）Cash in Mini Program(Mini Program's advertising components have been fully open since the beginning of July, and the proportion of advertising revenue of Mini Program traffic users is expected to be low this year.)

• Other income maintained rapid growth, partly offset by a decrease in interest income

Anxin Securities maintained its forecast for other income, up 52 per cent from a year earlier and 5 per cent to 18.3 billion yuan from a month earlier, accounting for 24 per cent of income.

Among them, cloud computing revenue has more than doubled year-on-year.；The interest income generated from the payment of deposits shows a decreasing trend before January next year.This is due to the fact that the central bank has gradually increased the centralized deposit ratio of third-party online payment providers (the central bank deposit ratio is 52% on July 9 and will rise to 100% on January 14, 2019). According to the company, this interest income accounts for a low double-digit proportion of other income; it is expected that the profit margins of other sectors will be reduced as a result of the decrease in this high gross margin.

3. Valuation repair: when will Tencent's share price return to 400?

• Tencent's historical dynamic price-earnings ratio

• Analysis of key factors affecting valuation repair

Anxin Securities believes that the current focus of the market isThe growth prospect, advertising realization progress and valuation repair space of chicken-eating mobile games.

Among them, Battle Royale Mobile Games's realization affects the income outlook for 2019 to a great extent, and Anxin Securities also makes a sensitivity analysis to the valuation. The main factors to be considered include1); Battle Royale Mobile Games's monthly income contribution; 2) Battle Royale Mobile Games's realization time; 3) price-to-earnings ratio in 2019。

Battle Royale Games's realization time is mainly affected by the policy.Anxin Securities believes that once the "three decisions" of the Ministry of Culture, the State Administration of Radio, Film and Television and the General Administration of Press and publication are implemented in the future, the examination and approval of domestic mobile game numbers is expected to resume.

It is expected that the earliest time to change is in the early first quarter of 2019 (optimistic), conservative in the late first quarter of 2019 (basic), and expected in mid-2019 at the latest (pessimistic). Then Tencent's corresponding valuation forecast is shown in the following figure.