UBS: Gives Tencent (00700) a "buy" rating and raises target price to 588 Hong Kong dollars.

UBS released a research report stating that TENCENT (00700) saw an 8% year-on-year growth in total revenue in the third quarter, in line with expectations. Adjusted operating profit was slightly higher than expected by 1%, with adjusted net profit reaching 59.8 billion RMB, a 33% year-on-year increase, exceeding market expectations by 11%. The bank raised its target price from 580 HKD to 588 HKD, and gave a "buy" rating. The report mentioned that growth trends for Tencent's game "DnFM" have slowed down, but other flagship games such as "Honor of Kings," "PUBG," and "Peacekeeper Elite" performed better than expected, showing continuous year-on-year growth. The bank expects domestic and international game revenue to grow by 10% and 15% respectively by 2025. UBS pointed out that although Tencent's adjusted net profit growth in the third quarter exceeded market expectations, gross profit margin was dragged down by one-time expenses. The bank expects these expenses to normalize over the next few quarters, with factors including increased costs for advertising and Olympics-related content, as well as a time lag in booking game employee bonuses relative to actual game revenue, leading to an increase in general and administrative expenses. As cash revenue converts to revenue, UBS expects a positive operating leverage effect to come into play. In addition, Tencent introduced a new service called Weixin Mini-Shops, which provides customers with features like product indexing, quality control systems, and after-sales services. UBS noted that the goal of Weixin Mini-Shops is to target the overall e-commerce market, and although it may take time to develop, the potential growth is expected to be significant.