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Rating Action:

Moody's upgrades Tencent to A1, outlook stable

 The document has been translated in other languages

23 Mar 2018

Hong Kong, March 23, 2018 -- Moody's Investors Service has upgraded Tencent Holdings Limited's issuer and senior unsecured debt ratings to A1 from A2. Moody's has also upgraded Tencent's senior unsecured MTN program rating to (P)A1 from (P)A2.

The outlook on the ratings is stable.

RATINGS RATIONALE

"The upgrade reflects Tencent's consistently solid revenue and EBITDA generation, and the company's proven ability to maintain a strong credit profile while expanding its business," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

"The upgrade also reflects our expectation that Tencent will continue to exercise discipline in its financial management and keep its debt leverage stable, while pursuing further business growth," adds Choi, who is also Moody's Lead Analyst for Tencent.

Moody's believes that Tencent's revenue and EBITDA growth will be strong, as the company expands its internet products and services to monetize its large Weixin active user base, which totaled 989 million at the end of 2017.

Tencent's revenue diversification has also increased because it has successfully developed revenues from multiple sources, including online games, social networks, online advertising, mobile payment and cloud services.

Tencent's revenue reliance on PC games has declined, as seen by revenue from smart phone games accounting for approximately 26% of total revenue in 2017, up from 15% in 2014.

At the same time, online advertising contributed 17% of total revenue, up from 11% over the same period, and revenue contribution from the 'others' segment, which includes online payment and cloud services, doubled to 18% from 9%.

To cultivate new revenue sources, Tencent has to continue investing to enhance the customer experience and user stickiness of its platform. While some investments take time to generate cash flow and can dilute its EBITDA margin in the near term, the company has maintained its consolidated EBITDA margin at around 35%-40%. Moody's says this achievement is because of Tencent's expanding business profile and increasingly diversified revenue portfolio.

Moody's says that Tencent will likely continue to maintain stable EBITDA margins above 35% over the next two years.

Moody's expects Tencent's revenue and EBITDA to increase 15%-30% per annum over the next two years. Such strong growth will continue to lift the company's already large scale and profits, which are at levels appropriate for its A1 ratings.

Moody's points out that Tencent has adopted a prudent approach to financial management, while pursuing growth.

In the last two years, the company invested approximately RMB50 billion-RMB90 billion per annum in cultivating new growth areas, including mobile games, digital content, payment, cloud, artificial intelligence technology and smart retail. Although some of these investments have yet to contribute meaningful cash flow, they have increased customer stickiness on Tencent's platform, enhanced user experiences and increased monetization opportunities.

Despite such large spending, the company kept debt leverage — as measured by debt/EBITDA — at around 1.5x during the past two years. And, Tencent's adjusted debt/EBITDA of around 1.4x at the end of 2017, as well as its RMB16 billion net cash position are at levels Moody's says are strong and which support its A1 ratings.

The company will likely continue to invest in its businesses and infrastructure to ensure sustainable growth, and maintain a prudent financial policy, keeping leverage at around 1.5x over the next two years.

Tencent's liquidity is solid. The company reported operating cash flow of around RMB106 billion in 2017 and cash on hand of RMB148 billion, including fixed deposits of RMB42 billion. Tencent's liquid resources far exceed its short-term debt of RMB20 billion and planned capital investment. In addition, Tencent holds a portfolio of listed associates and available-for-sale financial assets (excluding listed subsidiaries) totaling RMB211 billion in fair value as of the end of 2017. These resources can serve as back-up liquidity.

Tencent's A1 issuer rating reflects its position as a leading provider of value added services in PC and mobile online games, social communications, digital content and mobile payment services in China (A1 stable). Tencent's large customer base and its multiple platforms for monetizing new services have helped sustain cash flow.

The rating also reflects the company's prudent financial management, low debt leverage, and strong cash position.

On the other hand, the rating is constrained by three key factors: (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 investment in R&D and marketing over the long term; and (3) regulatory risks faced by the company's business and in terms of its corporate structure.

Upward ratings pressure will be limited in the near term because the company's ratings are already at the same level as the Government of China's sovereign rating; with China representing the country in which Tencent conducts most of its operations and activities.

Downward ratings pressure could emerge if Tencent: (1) experiences a sustained erosion in its active user base, which leads to lower cash flow and pushes its EBITDA margin below 35% on a sustained basis; (2) engages in aggressive acquisitions that pressure its balance-sheet liquidity or raise its overall risk profile; (3) undertakes an aggressive dividend policy that weakens its balance-sheet liquidity, or there is 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, retained cash flow/debt falling below 35%, and if the company records a net debt position.

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

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 social network services, online game platforms and digital content, including news, video, music and literature. As of 31 December 2017, it was 33.2%-owned by Naspers Limited (Baa3 stable).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
VP - Senior Credit Officer
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

Gary Lau
MD - Corporate Finance
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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