Of all Chinese internet stocks, one company has the “best risk-reward” for investors, Morgan Stanley says. That’s tech giant Tencent, according to the bank. The company has games, online advertising businesses and also owns chat app WeChat, among other units. It called Tencent a “safe haven” and named it its top pick in this sector. Morgan Stanley raised its price target for Tencent from 450 Hong Kong dollars to 480 Hong Kong dollars ($57.80 to $61.70). That represents a potential upside of around 12%. “We think Tencent has the best risk-reward among Chinese Internet stocks, with structural tailwinds in games, share gain across segments, high earnings visibility,” the bank said in a Sept. 25 report. “In the event of a sustainable rally in China’s Internet industry, we also see further upside from potential monetization of the listed investment portfolio (US$79bn as of 2Q24),” Morgan Stanley analysts wrote, referring Tencent’s equity ownership in other firms. According to its interim 2024 report, Tencent invests in the Fintech and retail, cloud and AI, social and digital content sectors. Tencent’s valuation remains “undemanding” at 13 to 14 times 2025’s price-to-earnings ratio, even after its recent rally, the bank noted. Its shares have jumped since mid September, from about around 374 Hong Kong dollars to the current 424 Hong Kong dollars. As for its games unit, Morgan Stanley says the firm will enjoy “near-term catalysts,” adding that there will be a “robust” pipeline, with its evergreen games set to continue netting growth. It estimates Tencent’s games revenue growth could rise 13% and 10% year on year in the second half this year and in 2025, respectively. Tencent’s advertising growth is set to remain “resilient,” with market share gains even amid weak macro economic conditions, said the bank. It estimates advertising revenue growth of 14% in the second half this year and 15% in 2025. “Rising adoption of mini-games should also lead to higher ad revenues, which is a key source of monetization (in addition to in-game purchases) for mini-games. Tencent is one of the largest beneficiaries, given its leading position in game distribution,” it said. Amid intensifying competition, there’s also “significant potential” for Tencent to capture higher advertising spending from Alibaba, the bank added. — CNBC’s Michael Bloom contributed to this report.
