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Announcement:

Moody's: Tencent's solid 2019 results support its A1 ratings

23 Mar 2020

Hong Kong, March 23, 2020 -- Moody's Investors Service says that Tencent Holdings Limited's (A1 stable) full-year 2019 results are slightly ahead of Moody's expectations, and support the company's A1 issuer and senior unsecured ratings.

"We expect that Tencent will continue to benefit from revenue diversification and generate positive free cash flow to support its investment needs over the next 12-18 months, while maintaining a prudent financial discipline and credit profile that's commensurate with its A1 ratings, " says Lina Choi, a Moody's Senior Vice President.

Tencent's revenue grew by 21% year-on-year, reaching RMB377 billion in 2019 compared to RMB313 billion in 2018, mainly driven by the strong growth in its fintech and business services, social networking and online advertising segment , and the recovery in its online games business.

Tencent's online games revenue saw a 10% increase year-on-year in 2019, after a period of sluggish growth in 2018. The recovery was mainly driven by the popularity of key games and the release of new games.

Consolidation of Supercell -- a Finnish mobile game developer that Tencent acquired in 2016 with a consortium -- also helped spur growth in its online games segment. Tencent announced in October that it would acquire additional shares in the consortium and raised its stake to 51.2%. Operating results of Supercell have been fully consolidated in Tencent's financial statements for the last quarter of 2019.

Meanwhile, Tencent continues to diversify its revenue sources through growing its fintech and business services, as well as online advertising segment. These business segments posted year-on-year growth of 39% and 18% respectively in 2019, reducing Tencent's reliance on its online games business, which comprised 30% of total revenue in 2019, down from 33% in 2018.

Moody's expects that Tencent's revenue will continue to grow by 15%-20% over the next 12-18 months, supported by stable growth of its online games segment and continued efforts to monetize its 1.16 billion Weixin and WeChat monthly active user base.

Moody's believes that Tencent will benefit from more robust growth in its online games and cloud services segments. The global spread of the coronavirus will reduce outdoor activities and restrict travel for consumers in China and other parts of the world. In turn, Moody's expects consumers' online activities will increase. Providers of online services such as online teaching platforms and business communications will also require more cloud services.

Solid growth in online entertainment and cloud will likely be offset by weaker growth in online advertising and payment businesses. These two segments are more susceptible to slower economic growth and reduced offline consumption. In 2019, online advertising comprised 18% total revenue, while fintech and business services comprises 27% total revenue.

Tencent's adjusted EBITDA margin was stable at around 38% in 2019, supported primarily by prudent cost controls and Supercell's contribution in the last quarter of 2019. Online and mobile games enjoy higher profit margins than other business segments.

Moody's expects that Tencent will register EBITDA margins of around 30%-35% over the next 12-18 months, as the company continues to diversify its revenue sources with non-games services. Nevertheless, Tencent's total EBITDA will continue to grow by 10%-15% per annum over the next 12-18 months.

Tencent's leverage — as measured by adjusted debt/EBITDA — was steady around 1.6x as of 31 December 2019.

Tencent's cash flow generation remains strong, as reflected by its reported operating cash flow of RMB149 billion (39% of revenue) in 2019, compared to RM111 billion (35% of revenue) in 2018. Meanwhile, its net investing cash outflow decreased to RMB116 billion during the same period.

Moody's expects that Tencent's leverage will stay below 2.0x over the next 12-18 months, due to steady earnings growth and investment needs to support its business growth. This leverage level is appropriate for its A1 ratings.

Tencent's liquidity position is solid. At 31 December 2019, it held cash and cash equivalents of RMB187 billion, including term deposits and treasury investments of RMB54 billion. Tencent's liquid resources far exceeded its short-term debt of RMB37 billion, including the current portion of its lease liabilities.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Tencent Holdings Limited is a leading provider of internet value added services in China. It operates leading communications and social services, online game platforms and digital content, including news, video, music and literature. As of 31 December 2019, it was 31%-owned by Naspers Limited.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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