-In Q2 Tencent¡¦s revenue reached RMB 19.75bn, increasing 37% YoY and 7% QoQ, gross profit was 12.17bn, increasing 56% YoY and 15% QoQ, and net profit reached 5.84bn, increasing 59% YoY and decreasing 9% QoQ. On the whole, in spite of negative impact of administrative expense and tax, performance in Q2 exceeded the market forecast.

-Soaring revenue of mobile game had driven profit increase in 2014. In past quarters Tencent¡¦s revenue of mobile game kept high growth. Its revenue in Q2 reached 3bn, equal to 5 times of revenue of mobile game in 14Q4. Total revenues generated from smart phone games integrated with Mobile QQ and Wechat increased sequentially to approximately RMB3 billion for the second quarter of 2014, reflecting growth in our paying user base and ARPU driven by mid-core games and in-game promotions. MAU of mobile QQ and Wechat was 520 and 440, respectively rising 45% and 57% YoY. Tencent¡¦s ARPU reached 100-110 in Q2 from 80-90 in Q1, increasing 25% QoQ, bringing obvious effect on revenue increase.

-Tencent continued to enrich our O2O ecosystem by making strategic investments in and partnering with classified listings company 58.com and map service provider NavInfo. We believe its users will benefit from the expanding range of quality services enabled by O2O partners, broadening and enhancing their user experiences.

How we view this

Sharp increase of mobile game is the major driver of performance growth of Tencent currently. We think that revenue of mobile game has reached enough large scales because Tencent enlarged user number and user stickiness, so it¡¦s hard to maintain the high growth. We expect that revenue of mobile game in future quarters will keep stable basically but with increasing gross profit margin.1H2014.

Investment Action

The game business of mobile terminals had become performance driver of Tencent Holdings in 2014. 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 "Neutral" for Tencent Holdings, with 12m TP at HKD 136,corresponding to 43x and 32x of expected P/E ratio in 2014 and 2015 respectively.

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