Stock pick: Munro Partners

Company Tencent
Ticker HKG: 0700 (Hong Kong)
Sector Communications

Chinese internet giant Tencent (HKG: 0700) has several highly successful business units spanning online games, entertainment, social media, payments and cloud computing.

Starting in games, Tencent is the number one mobile game publisher globally, and we expect their market share to continue to grow with several big releases slated for 2020. Next, Tencent has leading video streaming and music platforms in China, with both offerings under-monetised relative to western equivalents like Netflix and Spotify. In social, Tencent dominates, with its WeChat platform used by 1.2 billion people and its ad loads are very low relative to peers like Facebook, meaning there is considerable upside for the future. Lastly, Tencent’s “other” business divisions include a massive digital payment platform (it shares the market with Alibaba’s Ant Financial) and a cloud computing business (cloud penetration is low in China relative to the US).

We already liked the underlying drivers of Tencent’s business but believe that many of these areas may even start to inflect higher in a post COVID-19 world. Tencent is well positioned in a world that will require more social distancing, resulting in more consumption of entertainment online, more remote working and a rapid increase in e-commerce sales.

We consider the stock compelling. The stock trades at a 19 times 2021 EV/EBITDA multiple. Sales and EBITDA are both forecasted to grow in excess of 20%. We see considerable scope for the business to continue to grow at very high levels and the potential for the share price doubling over the next five years.

Risks include gaming industry regulation, a macro slowdown which would impact ad sales, content related failures (new game launches, entertainment, etc.) and increased competition from other tech companies.

This information has been prepared and provided by Munro Partners. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.