In the first quarter of 2014, the gross income of Tencent Holdings reached RMB 18.4 billion, increasing by 36% on year-on-year basis and 8% on quarter-on-quarter basis respectively; the net profit reached RMB 6.46 billion, increasing by 60% on year-on-year basis and 65% on quarter-on-quarter basis respectively; and the net profit of Non-GAAP reached RMB 5.2 billion, increasing by 29% on year-on-year basis and 17% on quarter-on-quarter basis respectively. The net amount of other earnings of the company greatly increased by 1.2 billion to 1.6 billion in the first quarter, mainly coming from the profits of RMB 1.942 billion and RMB 743 million made in disposing the e-commerce business and selling the stock rights of China Vision Media Group Limited respectively, which is also the main reason of the net profit growth exceeding expectation;

Tencent Holdings will publish its interim performance and the second quarter performance of 2014 in the middle of August, and we expect that the performance of mobile game will exceed expectation. The income of mobile game of the company in the first quarter rose by 200% to RMB 1.8 billion sharply compared with the last quarter. We expect that the growth momentum of mobile QQ and WeChat game will continue in the second quarter, which is expected to remain the growth on quarter-on-quarter basis of over 70%, exceeding RMB 3 billion. The income of mobile game of the company will reach RMB 12 billion in 2014;

In recent months, Tencent Holdings has purchased the stock rights of several Internet and technology companies, mainly including 214 million USD used for purchasing 15% of Jingdong shares before going public, 736 million USD used for purchasing 19.9% of 58.com shares and RMB 1.17 billion used for purchasing 11.3% of NavInfo shares.

How we view this

We hold a positive opinion on these 3 batches of transactions. The purchase of stock rights of Jingdong is of great significance, because Jingdong will become an e-commerce partner of Tencent Holdings, while the e-commerce business of Tencent Holdings will gradually fade out. The purchase of stock rights of 58.com will actively promote commercialized WeChat, because 58.com will provide WeChat with vertical service, while WeChat will become the third-party mobile platform for multiple offline service businesses of 58.com. As for the purchase of NavInfo, it has made up the deficiency of Tencent Holdings in the field of map service resources, improving the shortcoming of O2O business.

Investment Action

Tencent Holdings is one of the best Internet companies in China. The game business of mobile terminals will continue to drive the rapid growth of its performance in 2014, besides, with the gradual improvement of WeChat ecosphere, O2O business will become another pillar for commercialized mobile terminals from 2015. Better business models and more diversified WeChat services will support the monetization of its mobile terminals, which will become the main driving force of the share price in the future. To sum up, we maintain the rating of "Accumulate" for Tencent Holdings, with 12m TP at HKD 136,corresponding to 43x and 32x of expected P/E ratio in 2014 and 2015 respectively.

Click Here for PDF format...