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Rating Action:

Moody's assigns A1 to Tencent's proposed medium-term notes

13 Apr 2021

Hong Kong, April 13, 2021 -- Moody's Investors Service (Moody's) has assigned an A1 senior unsecured rating to Tencent Holdings Limited's (Tencent) proposed medium-term notes (MTN) drawn under its global MTN program.

The proceeds from the drawdown will be used for general corporate purposes.

RATINGS RATIONALE

"The proposed notes will strengthen Tencent's already strong liquidity position and support steady growth in revenue and cash flow," says Lina Choi, a Moody's Senior Vice President.

"Moreover, the company has maintained its prudent financial discipline and solid credit profile while expanding its businesses. The proposed drawdown will have a limited impact on its low leverage, which is appropriate for its A1 ratings," adds Choi, also Moody's Lead Analyst for Tencent.

Moody's expects that Tencent's revenue will continue to benefit from an accelerated digitization of business and consumer activities and generate strong cash flow to support its investment needs over the next 12-18 months. Its strong financial profile, supported by steady free cash flow generation and a prudent financial policy, provides a buffer against potential challenges from heightened regulatory risks.

Tencent's revenue growth has been driven by the strong increase in its online and smart phone games business. Revenue in the online games segment rose 36% year on year in 2020, as consumer demand increased during the pandemic. Moody's expects Tencent's revenue to increase by around 20% a year over the next 12-18 months, supported by stable growth across its various business segments.

Moody's forecasts Tencent's EBITDA margins will moderate to 33%-35% over the next 12-18 months as the company continues to diversify its revenue sources with nongame services, which carry a lower profit margin than the games business. Nevertheless, Tencent's total EBITDA will continue to grow by 10%-15% a year over the next 12-18 months.

Moody's expects only a limited impact from the note issuance on Tencent's low leverage, because the company's revenue and cash flow generation will remain strong. Tencent's leverage — as measured by adjusted debt/EBITDA — was steady at around 1.5x as of 31 December 2020.

Tencent's liquidity position remains excellent. As of 31 December 2020, it held cash and cash equivalents of RMB227.9 billion, including term deposits and treasury investments of RMB75.1 billion. Tencent's liquidity far exceeded its short-term debt of RMB18.1 billion, including the current portion of its lease liabilities. The company's strong financial quality will provide a buffer against recent heightened regulatory scrutiny.

Tencent's A1 issuer rating reflects the company's position as a leading provider of value-added services (VAS) in PC and mobile online games, communication and social, digital content and mobile payment services in China.

The rating considers Tencent's large customer base and its ability in monetizing through VAS, which have helped sustain cash flow.

Tencent's ratings are constrained by 1) operating challenges in the internet industry, with rapidly changing consumer preferences; 2) the need for Tencent to develop and invest in new products and services, which entails significant capital investments in R&D and marketing over the long term; and 3) heightened risks relating to recently introduced anti-trust regulations.

Apart from a strong financial profile, Tencent also has a track record of working with regulators, resolving differences and making changes without negatively affecting its business profiles.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Tencent's ratings also take into account the following environmental, social and governance (ESG) factors.

Social risks that Moody's considers in Tencent's credit profile include data security. This risk is considered moderate although the company processes large amounts of confidential personal information and other types of sensitive records, which could increase legal, regulatory or reputational risks in the event of a cybersecurity breach. Tencent deploys advanced technologies to safeguard users' data security.

The company complies with legal and regulatory requirements for the collection, processing, retention and protection of data. Tencent's network and data security management measures are certified by the International Organization for Standardization (ISO), which is an independent, non-governmental organization with a membership of 164 national standards bodies. Based on Tencent's 2020 annual report, the company has stipulated rules on the collection and use of user's personal information and publicize the rules in the places and websites where it operates or serves. Tencent also has a dedicated privacy team within the Legal Department, which is responsible for handling data protection matters.

From a governance perspective, Tencent operates with a variable interest entity (VIE) structure, and the main VIEs (onshore operating companies) that generate cash flow are controlled by Ma Huateng, one of the company's founders and an 8.4% shareholder as of the end of 2020. However, we also take into consideration Tencent's diversified shareholder base, a balanced board composition featuring a majority of independent nonexecutive directors and the company's long history as a listed and regulated entity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The stable outlook reflects Tencent's consistently solid revenue and EBITDA, and the company's proven ability to maintain a strong credit profile while expanding its business. In addition, Moody's expects the company to maintain disciplined financial management to keep its debt leverage stable while pursuing business growth.

Upward rating pressure will be limited in the near term because Tencent's rating is already at the same level as China's sovereign rating. Tencent conducts most of its operations and activities in China.

Downward rating pressure could emerge if Tencent (1) experiences a sustained erosion in its active user base, which leads to lower cash flow on a sustained basis; (2) engages in aggressive acquisitions that strain its balance-sheet liquidity or raise its overall risk profile; (3) adopts an aggressive dividend policy that weakens its balance-sheet liquidity or (4) there is evidence of cash leakage to its parent or related companies; or (5) demonstrates a weaker credit profile — with debt/EBITDA trending toward 2.0x on a sustained basis — and records a net debt position. Moody's will also monitor for any sustained deterioration in its adjusted retained cash flow/debt, which has remained at around 45%-60% since 2015.

Furthermore, adverse developments in China's regulatory regime, which could affect Tencent's operations or business model, would be negative for the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Tencent Holdings Limited (Tencent) is a leading provider of internet VAS in China. The company operates leading communication and social services, online game platforms and digital content, including news, video, music and literature. The company has three main streams of revenue: VAS, online advertising and FinTech and Business Services.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

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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