Tech

Analysts say shares of Chinese tech juggernaut Tencent are still a buy despite its dismal earnings

Key Points
  • Analysts say Tencent's stock is still worth buying, with at least three firms raising their price targets.
  • The Chinese tech giant posted a more-than-expected 32 percent decline in fourth-quarter profit on Thursday — its largest since going public in 2004.
  • The analysts say there's potential in Tencent's gaming, industrial internet and advertising divisions.
Tencent employees queue up to get red envelopes from Tencent founder Pony Ma Huateng outside the company's headquarters on February 12, 2019 in Shenzhen, Guangdong Province of China.
Zou Bixiong | Visual China Group | Getty Images

Chinese tech juggernaut Tencent posted on Thursday its slowest profit growth in 13 years, but analysts say shares in the company are still worth buying.

In fact, at least three firms raised their price targets on the stock after the quarterly results. On Friday, the stock closed at 365 Hong Kong dollars per share (about $46.52).

"We actually ... continue to have a buy rating and raise the target price to 430 (Hong Kong) dollars yesterday following the results," Alicia Yap, head of pan-Asia internet research at Citi, told CNBC's "Squawk Box" on Friday.

Over at Jefferies, which raised its price target on Tencent's stock to 420 Hong Kong dollars, analysts said weakness in the company's games division last quarter was "largely expected," though a strong initial performance by the company's first major mobile title of 2019, "Perfect World Mobile," and a robust pipeline should provide a "growth buffer for FY19 mobile game revenue."

Nomura also increased its price target for Tencent to 427 Hong Kong dollars per share, attributing the call to a higher valuation for online gaming on the back of the firms's own higher revenue forecasts.

Largest quarterly drop since IPO

The comments from the analysts came after Tencent posted a more-than-expected 32 percent decline in fourth quarter profit on Thursday — its largest since going public in 2004.

That was partly due to a slowdown in growth at its mobile gaming division, which was hit by a nine-month backlog in 2018 as a result of increased scrutiny from the Chinese government on video games. The firm, best known for creating China's largest messaging app, WeChat, is a gaming powerhouse with stakes in companies such as Activision Blizzard and Ubisoft.

Tencent President Martin Lau said on Thursday the company's gaming releases in China for 2019 would be initially slower than in previous years, due to the large backlog of requests over on the Chinese regulators' end, Reuters reported. Tencent will seek to grow gaming revenue from overseas markets by exporting its games and investing, Lau said.

"We see robust traction in new game approvals, with Tencent securing seven new mobile licenses since (December)," Jefferies analysts Karen Chan and Ken Chong said in a note.

Citi's Yap echoed that view, saying: "We do believe right now (the Chinese government) is very diligently moving ahead on the approval process," though domestic titles were likely to be prioritized over foreign ones.

Tencent has yet to obtain approval to sell in-game items for titles such as the international smash-hit "Fortnite," which has already raked in billions overseas, in China.

Industrial internet and ad potential

Looking ahead, analysts saw potential in Tencent's investments into the industrial internet space.

According to Chan and Chong, Tencent's cloud business has the potential to reach 50 percent that of Alibaba's AliCloud platform by the 2021 fiscal year.

And, in Tencent's advertising arm, Yap said the company has been "doing quite well" despite the recent number likely missing expectations, with potentially "very strong growth" ahead for the business segment.

"We remain bullish about the outlook for Tencent's social ads, as we believe WeChat remains under-monetized in the ad business," Nomura analysts Jialong Shi, Carson Lo and Michael Tam said in a note.

"The rising popularity of mini programs should enable WeChat to gain more ad budgets from those service providers such as OTA (online travel agencies), e-commerce and education advertisers, once these service providers are migrating part or entire of their businesses into WeChat through mini programs," they said.

Mini-programs are applications within WeChat that allow consumers to access services ranging from banking to ride-hailing.

— Reuters contributed to this report.