Institution: Guoxin Securities
Rating: increase holdings
Target valuation range: HK $380 to HK $400
Revenue is lower than expected, advertising growth continues to decline
Revenue in the third quarter rose 21% from a year earlier to 97.2 billion yuan, below market expectations. This year's advertising business has been slightly lower than expected since the first quarter and accelerated its decline in the third quarter. This reflects: 1, the competition from the headlines; 2, the current situation of China's macroeconomic pressure. Advertising revenue grew by only 13% in the third quarter, the lowest level since the company went public. Among them, social advertising increased by 32%, while media advertising decreased by 28% compared with the same period last year. According to our macro-economic judgment, it is expected that the advertising growth rate of Q4 will become the low point of the growth rate.
The game is resilient, and overseas games are expected to become a new growth point.
The game business maintained steady growth, with mobile games up 25% year-on-year and online games up 11%. The main reason is that Arena of Valor's basic market is stable, "Game for Peace" also gets a lot of benefits, and deferred income is significantly higher than Q2. Since the third quarter, overseas games have grown rapidly, the number of monthly active users of "PUBGMOBILE" has doubled compared with the same period last year, and the number of "CallofDutyMobile" downloads has exceeded 100 million.
Maintain rapid growth in payment and cloud business
Payment and cloud maintained a rapid growth rate of 36% in the third quarter, while cloud revenue increased by 80% to 4.7 billion yuan compared with the same period last year. We can see that with the slowing down of competition in the payment business this year, Tencent Alipay has reduced rebate discounts at merchants, while the company has actively carried out value-added services, resulting in a steady increase in the gross profit margin of the payment business, which lays the foundation for the improvement of the scale of payment business profits next year and the year after next.
Investment suggestion
We slightly downgrade 2019-2020 revenue growth rate of 22% (0pct), 20% (- 1pct), net profit growth to 23%, 17% (flat), advertising business is expected to hit bottom in Q4Bing 2019, 2020 EPS of HK $11.1, 13.7, considering RMB appreciation, and the economy hit bottom recovery advertising will pick up, we maintain to increase our rating, and maintain the target valuation range of HK $380 to HK $400 The current stock price corresponds to the PE of 2019-2020 for 27XJI 23x.
Risk hint
The adverse impact of macroeconomic uncertainty on the advertising business, the growth of the game is not as expected.