Hong Kong, May 25, 2020 -- Moody's Investors Service has assigned an A1 senior unsecured rating
to Tencent Holdings Limited's proposed medium-term notes
drawn under its USD20 billion global MTN program.
The rating outlook is stable.
The proceeds from the drawdown will be used for general corporate purposes.
RATINGS RATIONALE
"The proposed notes will further enhance Tencent's already
strong liquidity position, and enable it to sustain 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.
Tencent benefits from the increasing diversification of its revenue resources.
Specifically, the company demonstrates a strong ability to monetize
new products and services across a large and active customer base.
As of 31 March 2020, the company's monthly active user base for
Weixin and WeChat reached 1.2 billion, up 8% year-on-year.
In 2019, Tencent's advertising and other businesses —
including online payment and FinTech services, social and media
advertising, and cloud services — rose by 30% year-on-year
and contributed 47% of total revenue. This improvement helped
mitigate slower growth in PC-based and smart phone games revenue.
Tencent's online games business — including PC-based
and smart phone games — also rose by 31% year-on-year
in 1Q2020, driven by increased user engagement as consumers spent
more time at home during the coronavirus outbreak.
Moody's expects that Tencent's EBITDA margin will decline
moderately to 35%-37% from about 38% in 2019,
mainly because of the revenue shift in its business mix. The company's
fast growing non-games businesses, such as advertising and
digital content, carry lower margins than its games business.
Given the persistently solid growth in Tencent's cash flow, Moody's
believes the benefits of revenue diversification outweigh moderate margin
declines.
Tencent maintained stable leverage, as measured by adjusted debt/EBITDA,
at 1.6x as of 31 March 2020, as strong EBITDA growth offset
the increase in debt.
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.
Moody's expects Tencent will continue to exercise prudence in its
financial management, and maintain leverage at a level appropriate
for its A1 ratings, while pursuing business expansion.
Tencent's liquidity position is solid. As of 31 March 2020,
its cash and cash equivalents of RMB199.8 billion, including
term deposits and treasury investments of RMB64.5 billion,
far exceeded its short-term debt of RMB20.9 billion.
The stable ratings outlook reflects Tencent's consistently solid revenue
and EBITDA generation, and the company's proven ability to
maintain a strong credit profile while expanding its businesses.
Tencent's ratings also take into account the following environmental,
social and governance (ESG) factors.
Social risks include data security. This risk is considered moderate
because 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.
The company complies with legal and regulatory requirements for the collection,
processing, retention and protection of its 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.
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 founders and an 8.53% shareholder.
However, Moody's has also considered Tencent's diversified
shareholder base, its balanced board composition featuring mostly
independent nonexecutive directors and the company's long track record
as a listed and regulated entity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade is unlikely in the near term, because the company's ratings
are already at the same level as China's sovereign rating.
Tencent conducts most of its operations and activities in China.
Moody's could downgrade the ratings 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 there is an evidence of cash leakage
to its parent or related companies; or (4) demonstrates a weaker
credit profile — with debt/EBITDA trending toward 2x on a sustained
basis — and records a net debt position. We will also monitor
for any sustained deterioration in its adjusted retained cash flow/debt,
which has been maintained at around 45%-60% since
2015.
Adverse developments in China's regulatory regime, which could
affect Tencent's operations or business model, would also be negative
for the ratings.
The principal methodology used in this rating was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/research/Business-and-Consumer-Service-Industry--PBC_1037985.
Alternatively, 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 social network services,
online game platforms and digital content, including news,
video, music and literature. As of 31 March 2020, it
was 31.0%-owned by Naspers Limited.
REGULATORY DISCLOSURES
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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
