Article / 06 November 2015 at 11:00 GMT

Earnings Watch: Can Tencent live up to high expectations?

Head of Equity Strategy / Saxo Bank
Denmark
  • Tencent earnings to spotlight games, advertising
  • Analysts expecting Tencent to post sales growth of 28%
  • Chinese firm's valuation high but not stratospheric 

Tencent

Poised for growth: Tencent's headquarters in Shenzhen. Photo: Wikimedia Commons

By Peter Garnry

The earnings season is in its final stage and next week 118 companies will report third-quarter earnings. The week's releases are slated to include several emerging market companies –particularly Brazilian companies – that could prove important for the MSCI Emerging Markets Index, but today we will focus our attention on Tencent – Alibaba's biggest competitor in the rapidly growing Chinese e-commerce market.

Ads, games and O2O boost growth

Tencent reports its Q3 earnings on Tuesday with analysts expecting earnings per share of RMB 0.87 (up 25% year-over-year) and sales of RMB 25,425 (up 28% y/y).

These high expansion targets are driven by strong growth in ads on its various platforms and, lately, performance-based ads on WeChat. Tencent has also been expanding into video content ads of late, and the firm is growing its O2O business (online-to-offline) and supporting it with capital to compete against Baidu. 

Lastly, Tencent is still big in mobile games which represents the company's largest segment, accounting for 57% of total revenue.

Tencent's valuation is still on the high side with trailing EV/EBITDA at 31x compared with Facebook's 44x, but Facebook is also growing faster and has higher margin potential. 

Compared to Alibaba, which is also valued at 44x on trailing EV/EBITDA, Tencent is more attractive for investors.

Tencent weekly share price since 2010:
Tencent share price

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Source: Saxo Bank 

The most important earnings releases next week are...

Monday: Continental, Bridgestone, Priceline

Tuesday: Pandora, Vivendi, Vodafone, National Grid

Wednesday: Henkel, Deutsche Post, E.ON, Carlsberg, UniCredit,

Thursday: Petrobras, Banco do Brasil, Manulife, Siemens, Merck KGaA, SABMiller, Enel, Cisco Systems

Friday: Mitsubishi UFJ, Sumitomo Mitsui, Mizuho Financial

Find earnings and revenue estimates on next week's earnings releases in the attached PDF.

— Edited by Michael McKenna

Peter Garnry is head of equity strategy at Saxo Bank

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Earnings Watch - 2015-11-09

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