8/17/2022 China Internet (OUTPERFORM) RESEARCH

Tencent Holdings Ltd. (700-HK, BUY) Bo Pei, CFA

)2Q Better than Feared; 2H Profits Should Resume Growth, with Video Accounts Bo.Pei@ustigersecurities.com

Monetization Ramping Rapidly; Maintain BUY and Decreasing PT to HK$380 (646) 437-6971

We are maintaining our BUY rating but decreasing PT to HK$380 (was HK$400) after Tencent
reported better-than-feared 2Q results and with solid progress in Video Account monetization. Tencent - Stock Data (as of 8/17/2022)
Domestic game revenue declined 1% y/y and 4% q/q due to softer player spending, fewer Ticker 700-HK
Rating BUY
game releases and minor protection measures. Int'l game revenue was flattish CC y/y (vs. +8% Current Price (HK$) $303.00
in 1Q), accounting for 25% (flat y/y) of total game revenue. Advertising revenue declined 18% Target Price (HK$) $385.00
Enterprise Value (HK$mm) $2,395,382
y/y (vs. -18% in 1Q), primarily due to COVID lockdowns in 2Q. FinTech+Cloud growth also Market Cap (HK$mm) $2,931,828
decelerated to +1% y/y (vs. +10% in 1Q), as lockdowns dampened payment volume and Shares Outstanding (mm) 9,676
impacted cloud project deployments. On a positive note, Video Accounts user time spent 52-week Price Range HK$288.00 - HK$529.00
30-day Avg. Trading Volume (mm) 20.20
already reached 80% of Moments’, with views up 200% y/y. Tencent launched in-feed ads in
Video Accounts in July, started selling on a contract basis, and plans to launch bidding ads in Tencent - Key Metrics (RMB Bn, except EPS)
Fiscal Year Ending Dec-20 Dec-21 Dec-22E Dec-23E
August. Moreover, the company expects Video Accounts’ revenue to reach over RMB 1B within Revenue 482.1 560.1 562.2 631.6
five quarters with high incremental margin. In addition, the mgmt. is confident in resuming Revenue Growth 28% 16% 0% 12%
Gross Profit 221.5 245.9 240.4 272.4
positive earnings growth despite the macro weakness with ongoing efficiency initiatives. In 2Q, Non-GAAP Operating Income 149.4 156.2 146.0 165.1
Non-GAAP EPADS ¥12.69 ¥12.70 ¥12.38 ¥14.28
the company repurchased 9.7M shares for approximately RMB 3.1B, and paid cash dividend of EV/Sales 4.3x 3.7x 3.7x 3.3x
PE (Non-GAAP) 20.7x 20.7x 21.2x 18.4x
RMB 13B.
Quarterly Revenue
1Q 2Q 3Q 4Q
Overall, we believe 2Q marks the toughest transitional period for Tencent, and both revenue (RMB Bn)
2020A 108.1A 114.9A 125.4A 133.7A
and profit growth should start to improve in 3Q. While gaming businesses growth might remain
2021A 135.3A 138.3A 142.4A 144.2A
muted through ’22, improving macro in China and Video Accounts ads should offset some of 2022E 135.5A 134.0A 143.8E 148.9E
the negative impacts. Finally, the regulatory environment for Chinese Internet companies has
Quarterly non-GAAP
stabilized, which should improve investor sentiment for the sector. EPS (¥)
1Q 2Q 3Q 4Q

2020A 2.817A 3.130A 3.314A 3.413A

2Q revenue 2% above Tiger and in line with Street. VAS revenue 4% above Tiger but 1% 2021A 3.415A 3.504A 3.269A 2.547A
2022E 2.620A 2.896A 3.319E 3.521E
below Street. Domestic games revenue declined 1% y/y (vs. -1% in 1Q), due to minor
protection and softer player spending. International games revenue was flattish y/y CC, as user
Tencent Holdings Ltd. (700-HK)
activity and spending continued to normalize post COVID. Online advertising revenue declined 800
18% y/y (vs. -18% in 1Q), but 13%/8% above Tiger/Street. FinTech+Cloud +1% y/y (vs. +10% 700

in 1Q), 3%/2% below Tiger/Street, and Cloud revenue declined y/y, as lockdowns negatively 600

impacted commercial payment volume/cloud project deployment and Tencent shifted focus 500

400
from scale to quality growth.
300

200
2Q non-GAAP EBIT 17%/8% above Tiger/Street. Gross profit was 7%/2% above
100
Tiger/Street, with gross margin 197bps/96bps above. By segment, VAS gross margins declined 0
230bps y/y on Video Accounts revenue sharing costs, and server and bandwidth costs, partially
offset by lower live streaming costs. Online Advertising gross margin decreased 818bps y/y
mainly on Video Accounts' server and bandwidth costs. FinTech+Cloud gross margin improved
Source：FactSet, US Tiger Securities estimates
131bps y/y, and 178bps q/q, as Tencent scaled back loss-making cloud projects. Sales and
marketing ratio was 5.9%, down from 7.2% in 2Q:21 on continued cost optimization; However,
G&A ratio increased to 19.6% (vs. 16.4% in 2Q:21) on higher staff costs. But total headcount
was down 5,000 q/q and more cost savings should start to realize in 3Q

Other highlights. Video Accounts' video views based on AI recommendation increased by

over 400% y/y, and daily active creators and daily video uploads in Video Accounts rose by
over 100% y/y. Introduced a frame-breaking advertisement format, which is popular among
brand advertisers

Estimate revisions. Lowering 3QE revenue by 1%, as we lower VAS by 3% but increase
advertising/FinTech + Cloud by 3%/1%. Increasing 3QE gross income by 2% with 112bps
better margin, and non-GAAP EBIT by 3%. Also decreasing '22E revenue by 2%, but
increasing '22E gross profit by 1%, and non-GAAP EBIT by 3%.

Please find US Tiger's Analyst Certification and other Important Disclosures at the end of this report.
Risks: 1) Antimonopoly: Tencent's WeChat is the largest social networking app in China and may face more antimonopoly scrutiny; 2) Game regulation risk:
if China tightens the game regulations, Tencent's game business growth might be impacted; 3) Personal data protection risk: China is tightening personal
data protection rules and might affect Tencent's ability to gain user data; 4) VIE risk: China might also tighten the use of a VIE (Variable Interest Entity), a
corporate structure most Chinese Internet companies use to attract foreign capital and list overseas; and 5) Overseas regulations risk: as a Chinese
company, Tencent might face more regulatory scrutiny in some overseas markets.

Valuation: Our HK$4380 PT (was HK$400) is based on SOTP: 1) Mobile and PC game valued at HK$181 per share, on 13x '23E EBITDA. 2) Tencent
Video valued at HK$8 per share, based on 2x '23E sales. 3) Tencent Music (TME) valued at HK$4 per share on current market value. 4) China Literature
valued at HK$2 per share on current market value. 5) Other VAS valued at HK$19 per share on 15x '23E EBITDA. 6) Online Advertising valued at HK$50
per share on 11x '23E EBITDA. 7) FinTech valued at HK$85 per share on 4x '23E revenue. 8) Cloud valued at HK$30 per share on 6x '23E sales. 9)
Unclassified costs valued at (HK$10) per share on 10x '22E EBITDA loss. 10) Net Debt at (HK$15) per share. 11) Equity investments at HK$72 per share.
12) Holding company discount at (HK$43) per share on a 10% holding company discount.

Figure 1: Actual vs. Expected (RMB millions, except EPS)

(RMB in millions, except EPS) 1Q:22A 2Q:22E 2Q:22A Delta
VAS Revenue 72,738 68,984 71,683 4%
Online Advertising Revenue 17,988 16,529 18,638 13%
FinTech and Business Services 42,768 43,499 42,208 -3%
Others 1,977 2,053 1,505 -27%
Total Revenue ¥135,471 ¥131,065 ¥134,034 2%
y/y Growth 0% -5% -3% 215bps
Total Cost of revenues ¥78,397 ¥77,066 ¥76,167 -1%
Gross profit - VAS 36,683 33,802 36,303 7%
Gross Margin - VAS 50.4% 49.0% 50.6% 164bps
Gross profit - Online Advertising 6,594 6,942 7,566 9%
Gross Margin - Online Advertising 36.7% 42.0% 40.6% -141bps
Gross profit - FinTech and Business Services 13,499 13,050 14,075 8%
Gross Margin - FinTech and Business Services 31.6% 30.0% 33.3% 335bps
Gross Profit ¥57,074 ¥53,999 ¥57,867 7%
Gross Margin 42.1% 41.2% 43.2% 197bps
Selling and marketing expenses 8,058 8,912 7,932 -11%
General and administrative expenses 26,669 22,281 26,233 18%
Total operating expense ¥34,727 ¥31,193 ¥34,165 10%
% of total revenues 25.6% 23.8% 25.5% 169bps
Interest income 1,737 1,787 1,945 9%
Other gains, net 13,133 4,000 4,420 11%
Operating income ¥37,217 ¥28,593 ¥30,067 5%
Operating margin 27.5% 21.8% 22.4% 62bps
Non-GAAP Operating income ¥36,538 ¥31,425 ¥36,667 17%
Non-GAAP OM % 27.0% 24.0% 27.4% 338bps
Non-GAAP EBITDA ¥46,102 ¥41,679 ¥44,668 7%
Margin % 34.0% 31.8% 33.3% 153bps
Finance costs, net (1,935) (1,935) (1,809) -7%
Share of profit/(loss) of associates and joint ventures (6,280) (2,000) (4,460) NM
Income Before Income Taxes ¥29,002 ¥24,658 ¥23,798 -3%
Income tax benefits/(expenses) (5,269) (3,699) (4,568) 24%
Net Income (loss) ¥23,733 ¥20,959 ¥19,230 -8%
Net income (loss) attributable to noncontrolling interests 320 (653) 611 NM
Net income/(loss) attributable to Shareholders ¥23,413 ¥21,612 ¥18,619 -14%
Weighted average number of shares (Diluted) 9,689 9,699 9,675 0%
Diluted GAAP EPS ¥2.404 ¥2.228 ¥1.915 -14%
Share-based compensation expenses 9,452 5,243 8,257 57%
Net (gains)/losses from investee companies (18,542) (4,000) (5,968) 49%
Amortisation of intangible assets 2,857 2,857 2,767 -3%
Impairment provision 7,827 1,000 3,189 219%
Non-GAAP Net income/(loss) ¥25,545 ¥25,987 ¥28,139 8%
Margin % 18.9% 19.8% 21.0% 117bps
Non-GAAP Diluted EPS ¥2.620 ¥2.679 ¥2.896 8%
Y/Y Change (%) -23.3% -23.5% -17.4% 618bps
Tax rate 18.2% 15.0% 19.2% 419bps

Source：Company reports, US Tiger Securities Research

Please find US Tiger's Analyst Certification and other Important Disclosures at the end of this report.
Figure 2: Actual vs. US Tiger vs. Consensus (RMB millions, except EPS)
Tiger vs. Actual vs.
2Q:22 Actual Tiger Consensus Actual vs. Tiger
Consensus Consensus
VAS Revenue 71,683 68,984 72,429 -5% 4% -1%
Online Advertising Revenue 18,638 16,529 17,204 -4% 13% 8%
FinTech, Business Services 42,208 43,499 43,211 1% -3% -2%
Total Revenue 134,034 131,065 134,576 -3% 2% 0%

Gross Income 57,867 53,999 56,810 -5% 7% 2%

Margin 43% 41% 42% -101 bps 197 bps 96 bps

GAAP Operating Income 30,067 28,593 41,364 -31% 5% -27%

Margin 22% 22% 31% -892 bps 62 bps -830 bps

Non-GAAP Operating Income 36,667 31,425 33,873 -7% 17% 8%

Margin 27% 24% 25% -119 bps 338 bps 219 bps

Adjusted EBITDA 44,668 41,679 47,554 -12% 7% -6%

Margin 33% 32% 35% -354 bps 153 bps -201 bps

GAAP Net Income 18,619 21,612 25,749 -16% -14% -28%

Margin 14% 16% 19% -264 bps -260 bps -524 bps

Non-GAAP Net Income 28,139 25,987 24,307 7% 8% 16%

Margin 21% 20% 18% 177 bps 117 bps 293 bps

GAAP EPS ¥1.915 ¥2.228 ¥2.510 -11% -14% -24%

Non-GAAP EPS ¥2.896 ¥2.679 ¥2.497 7% 8% 16%

Source： FactSet Consensus, Company reports, US Tiger Securities Research

Figure 3: Estimate Revisions (RMB millions, except EPS)

3Q:22E 4Q:22E
(RMB in millions except EPS) Old New Delta Old New Delta
VAS Revenue 75,747 73,289 -3% 77,489 71,310 -8%
Online Advertising Revenue 19,898 20,465 3% 23,407 21,827 -7%
FinTech, Business Services + Others 47,847 48,241 1% 55,205 52,929 -4%
Total Revenue ¥145,319 ¥143,822 -1% ¥158,900 ¥148,865 -6%

Gross Income 60,887 61,870 2% 65,896 63,593 -3%

Margin 42% 43% 112 bps 41% 43% 125 bps

GAAP Operating Income 33,591 33,348 -1% 34,918 35,399 1%

Margin 23% 23% 7 bps 22% 24% 180 bps

Non-GAAP Operating Income 36,994 37,985 3% 38,864 40,283 4%

Margin 25% 26% 95 bps 24% 27% 260 bps

Adjusted EBITDA ¥48,680 ¥49,358 1% ¥51,913 ¥52,130 0%

Margin 33% 34% 82 bps 33% 35% 235 bps

GAAP Net Income 25,860 24,508 -5% 26,989 26,251 -3%

Margin 18% 17% -76 bps 17% 18% 65 bps

Non-GAAP Net Income ¥30,805 ¥32,141 4% ¥32,477 ¥34,132 5%

Margin 21% 22% 115 bps 20% 23% 249 bps

GAAP EPS ¥2.664 ¥2.531 -5% ¥2.777 ¥2.708 -2%

Non-GAAP EPS ¥3.173 ¥3.319 5% ¥3.342 ¥3.521 5%

FY:22E FY:23E
(RMB in millions except EPS) Old New Delta Old New Delta
VAS Revenue 294,957 289,020 -2% 323,903 315,773 -3%
Online Advertising Revenue 77,834 78,892 1% 88,615 90,453 2%
FinTech, Business Services + Others 189,319 186,146 -2% 224,929 216,769 -4%
Total Revenue ¥570,766 ¥562,165 -2% ¥646,689 ¥631,633 -2%

Gross Income 237,856 240,404 1% 276,755 272,399 -2%

Margin 42% 43% 109 bps 43% 43% 33 bps

GAAP Operating Income 134,319 136,031 1% 159,427 152,634 -4%

Margin 24% 24% 66 bps 25% 24% -49 bps

Non-GAAP Operating Income 141,125 146,038 3% 172,421 165,101 -4%

Margin 25% 26% 125 bps 27% 26% -52 bps

Adjusted EBITDA ¥188,374 ¥192,258 2% ¥225,269 ¥215,751 -4%

Margin 33% 34% 120 bps 35% 34% -68 bps

GAAP Net Income 97,874 92,792 -5% 124,746 114,388 -8%

Margin 17% 17% -64 bps 19% 18% -118 bps

Non-GAAP Net Income ¥113,466 ¥119,957 6% ¥143,908 ¥138,839 -4%

Margin 20% 21% 146 bps 22% 22% -27 bps

GAAP EPS ¥10.086 ¥9.580 -5% ¥12.802 ¥11.768 -8%

Non-GAAP EPS ¥11.693 ¥12.385 6% ¥14.769 ¥14.284 -3%

Source： Company reports, US Tiger Securities Research

Please find US Tiger's Analyst Certification and other Important Disclosures at the end of this report.
Figure 4: Tencent SOTP Valuation
Multiples RMB in millions RMB in millions
Methodology 2023E 2020A 2021A 2022E 2023E Valuation Value/Share (RMB) Value/Share (HKD) Value/Share (USD)
Mobile + PC Games EV/EBITDA 13x 105,204 107,599 105,640 116,830 1,518,786 ¥157 $181 $23.1
Tencent Video EV/Sales 2x 28,690 30,627 29,978 31,760 63,520 ¥7 $8 $1.0
TME EV/Sales 1x 29,153 31,244 27,844 29,171 33,547 ¥3 $4 $0.5
China Literature EV/EBITDA 8x (4,289) 2,106 1,820 2,255 18,491 ¥2 $2 $0.3
Unclassified VAS EV/EBITDA 15x 7,391 7,410 10,550 10,550 158,247 ¥16 $19 $2.4

Social and Other Advertising EV/EBITDA 11x 33,990 33,885 29,812 34,886 397,702 ¥41 $47 $6.1
Media Advertising-News EV/EBITDA 11x 2,894 2,455 2,065 2,504 28,551 ¥3 $3 $0.4

Payment (Fintech) EV/Sales 4x 104,570 137,523 152,119 174,751 716,478 ¥74 $85 $10.9
Cloud EV/Sales 6x 23,516 34,672 34,027 42,018 252,110 ¥26 $30 $3.8

Unclassified Others EV/EBITDA 10x (920) (3,236) (5,815) (8,043) (80,430) ¥-8 -$10 -$1.2
Total EV 3,107,002 ¥321 $371 $47
Current debt 30,535
Long-term debt 305,809
Cash 276,328
Minority interest 67,387
Net debt (127,403) ¥-13 -$15 -$1.9
Investments 601,900 ¥62 $72 $9.2
Holding Company Discount@10% (358,150) ¥-37 -$43 -$5.5
Implied equity value 3,223,349 ¥333 $385 $49
Diluted shares outstanding 9,675

Source： Company reports, US Tiger Securities Research

Please find US Tiger's Analyst Certification and other Important Disclosures at the end of this report.
Figure 5: Tencent Revenue Drive
Tencent - Revenue Build '20-'23E
(RMB in m illions, except per share data) 2018A 2019A 2020A 1Q21A 2Q21A 3Q21A 4Q21A 2021A 1Q22A 2Q22A 3Q22E 4Q22E 2022E 2023E CAGR

Mobile Gam es Revenue 77,800 93,700 146,617 41,500 40,800 42,540 40,000 164,840 40,300 40,000 41,540 40,232 162,072 186,818 26%
Y/Y Grow th 24% 20% 56% 19% 13% 9% 9% 12% -3% -2% -2% 1% -2% 15%
as % of total revenue 25% 25% 30% 31% 30% 30% 28% 29% 30% 30% 29% 27% 29% 30%
Seasonality 25% 25% 26% 24% 25% 25% 26% 25%
PC Client Gam es Revenue 50,600 47,400 44,558 11,900 11,000 11,700 10,600 45,200 12,100 11,600 11,391 10,557 45,648 44,520 -2%
Y/Y Grow th -8% -6% -6% 1% 1% 1% 4% 1% 2% 5% -3% 0% 1% -2%
as % of total revenue 16% 13% 9% 9% 8% 8% 7% 8% 9% 9% 8% 7% 8% 7%
Y/Y Grow th 9% 10% 35% 15% 10% 7% 8% 10% -2% 0% -2% 0% -1% 11%

Social netw orks revenue 72,654 85,281 108,125 28,800 29,000 30,300 29,100 117,200 29,100 29,200 28,838 27,654 114,792 132,867 16%
Y/Y Grow th 30% 17% 27% 15% 9% 7% 4% 8% 1% 1% -5% -5% -2% 16%
as % of VAS revenue 41% 43% 41% 40% 40% 40% 40% 40% 40% 41% 39% 39% 40% 42%
as % of total revenue 23% 23% 22% 21% 21% 21% 20% 21% 21% 22% 20% 19% 20% 21%
Seasonality 25% 25% 26% 25% 101% 106% 25% 24%

Other VAS Revenue 48,246 58,891 73,037 19,043 20,213 20,963 21,313 81,532 20,338 20,083 20,358 20,520 81,299 84,435 13%
Y/Y Grow th 34% 22% 24% 20% 12% 10% 6% 12% 7% -1% -3% -4% 0% 4%
as % of VAS revenue 29% 28% 26% 28% 28% 30% 28% 28% 28% 28% 29% 28% 27%
as % of total revenue 15% 16% 15% 14% 15% 15% 15% 15% 15% 15% 14% 14% 14% 13%
VAS Revenue 176,646 199,991 264,212 72,443 72,013 75,203 71,913 291,572 72,738 71,683 73,289 71,310 289,020 315,773 16%
Y/Y Grow th 15% 13% 32% 16% 11% 8% 7% 10% 0% 0% -3% -1% -1% 9%
Seasonality 25% 25% 26% 25% 99% 101% 25% 25%
% of total revenue 56% 53% 55% 54% 52% 53% 50% 52% 54% 53% 51% 48% 51% 50%

Social and Other Advertising revenue 39,773 52,897 67,979 18,496 19,504 19,000 18,300 75,300 15,700 16,100 17,487 18,467 67,754 77,525 14%
Y/Y Grow th 55% 33% 29% 27% 28% 7% -10% 11% -15% -17% -8% 1% -10% 14%
Media Advertising Revenue 18,306 15,480 14,292 3,324 3,329 3,500 3,200 13,353 2,300 2,500 2,978 3,360 11,138 12,928 -6%
Y/Y Grow th 23% -15% -8% 7% 1% -3% -25% -7% -31% -25% -15% 5% -17% 16%
as % of advertising revenue 32% 23% 17% 15% 15% 16% 15% 15% 13% 13% 15% 15% 14% 14%
as % of total revenue 6% 4% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
New s Advertising 6,473 6,139 5,787 1,548 1,369 1,269 1,270 5,457 1,145 1,109 1,104 1,334 4,692 5,565
Y/Y Grow th -5% -6% 12% 3% -7% -26% -6% -26% -19% -13% 5% -14% 19%
Video Advertising 11,833 9,341 8,505 1,776 1,960 2,231 1,930 7,896 1,155 1,391 1,874 2,026 6,446 7,363 -8%
Y/Y Grow th 34% -21% -9% 2% 0% 0% -25% -7% -35% -29% -16% 5% -18% 14%
Online Advertising Revenue 58,079 68,377 82,271 21,820 22,833 22,495 21,518 88,653 17,988 18,638 20,465 21,827 78,892 90,453 10%
Y/Y Grow th 44% 18% 20% 23% 23% 5% -13% 8% -18% -18% -9% 1% -11% 15%
% of total revenue 19% 18% 17% 16% 17% 16% 15% 16% 13% 14% 14% 15% 14% 14%

Paym ent (Fintech) Revenue (Tiger est.) 63,983 84,122 104,570 32,510 33,050 34,688 37,275 137,523 36,492 33,769 39,612 42,246 152,119 174,751 28%
Y/Y Grow th 74% 31% 24% 46% 37% 25% 23% 32% 12% 2% 14% 13% 11% 15%
Business Services Revenue (Tiger est.) 9,155 17,233 23,516 6,518 8,842 8,629 10,683 34,672 6,276 8,439 8,629 10,683 34,027 42,018 35%
Y/Y Grow th 113% 88% 36% 56% 56% 56% 31% 47% -4% -5% 0% 0% -2% 23%

FinTech and Business Services 73,138 101,355 128,086 39,028 41,892 43,317 47,958 172,195 42,768 42,208 48,241 52,929 186,146 216,769 29%
Y/Y Grow th 78% 39% 26% 47% 40% 30% 25% 34% 10% 1% 11% 10% 8% 16%
Seasonality 23% 24% 25% 28% 89% 80% 26% 28%
% of total revenue 23% 27% 27% 29% 30% 30% 33% 31% 32% 31% 34% 36% 33% 34%
Others 4,831 7,566 7,495 2,012 1,521 1,353 2,799 7,685 1,977 1,505 1,827 2,799 8,108 8,638 5%
Y/Y Grow th 113% 57% -1% 39% 4% 30% -21% 3% -2% -1% 35% 0% 5% 7%
FinTech and Business Services + Others 77,969 108,921 135,581 41,040 43,413 44,670 50,757 179,880 44,745 43,713 50,068 55,728 194,254 225,408 27%
Y/Y Grow th 80% 40% 24% 47% 39% 30% 21% 33% 9% 1% 12% 10% 8% 16%
% of total revenue 25% 29% 28% 30% 31% 31% 35% 32% 33% 33% 35% 37% 35% 36%
Total Revenue 312,694 377,289 482,064 135,303 138,259 142,368 144,188 560,105 135,471 134,034 143,822 148,865 562,165 631,633 19%
Y/Y Grow th 32% 21% 28% 25% 20% 13% 8% 16% 0% -3% 1% 3% 0% 12%
Seasonality 24% 25% 25% 26% 24% 24% 26% 26%

Source： Company reports, US Tiger Securities Research

Please find US Tiger's Analyst Certification and other Important Disclosures at the end of this report.
Figure 6: Tencent Income Statement
Tencent Incom e Statem ent (CNY) '20-'23E
(RMB in m illions, except per share data) 2018A 2019A 2020A 1Q21A 2Q21A 3Q21A 4Q21A 2021A 1Q22A 2Q22A 3Q22E 4Q22E 2022E 2023E CAGR
Total Revenue 312,694 377,289 482,064 135,303 138,259 142,368 144,188 560,105 135,471 134,034 143,822 148,865 562,165 631,633 19%
Y/Y Growth 32% 21% 28% 25% 20% 13% 8% 16% 0% -3% 1% 3% 0% 12%
Cost of Revenue 170,574 209,756 260,532 72,668 75,514 79,621 86,371 314,161 78,397 76,167 81,951 85,272 321,761 359,235 20%
% of Revenue 54.5% 55.6% 54.0% 53.7% 54.6% 55.9% 59.9% 56.1% 57.9% 56.8% 57.0% 57.3% 57.2% 56.9%
Gross Profit 142,120 167,533 221,532 62,635 62,745 62,747 57,817 245,944 57,074 57,867 61,870 63,593 240,404 272,399 18%
Gross Margin 45.5% 44.4% 46.0% 46.3% 45.4% 44.1% 40.1% 43.9% 42.1% 43.2% 43.0% 42.7% 42.8% 43.1%
Y/Y Growth 21.5% 17.9% 32.2% 18.6% 17.9% 10.8% -1.8% 11.0% -8.9% -7.8% -1.4% 10.0% -2.3% 13.3%
Selling and marketing expenses 24,233 21,396 33,758 8,530 10,013 10,435 11,616 40,594 8,058 7,932 8,629 8,932 33,551 41,220 24%
% of Revenue 7.7% 5.7% 7.0% 6.3% 7.2% 7.3% 8.1% 7.2% 5.9% 5.9% 6.0% 6.0% 6.0% 6.5%
Y/Y Growth 37.3% -11.7% 57.8% 21.0% 29.1% 17.0% 15.8% 20.3% -5.5% -20.8% -17.3% -23.1% -17.3% 22.9%
General and administrative expenses 41,522 53,446 67,625 18,967 22,638 23,862 24,380 89,847 26,669 26,233 25,888 25,307 104,097 103,225 25%
% of Revenue 13.3% 14.2% 14.0% 14.0% 16.4% 16.8% 16.9% 16.0% 19.7% 19.6% 18.0% 17.0% 18.5% 16.3%
Y/Y Growth 25.6% 28.7% 26.5% 34.0% 37.2% 38.8% 23.3% 32.9% 40.6% 15.9% 8.5% 3.8% 15.9% -0.8%
Operating Incom e (Loss) 97,648 118,694 184,237 56,273 52,487 53,137 109,723 271,620 37,217 30,067 33,348 35,399 136,031 152,634 9%
Operating M argin 31.2% 31.5% 38.2% 41.6% 38.0% 37.3% 76.1% 48.5% 27.5% 22.4% 23.2% 23.8% 24.2% 24.2%
Y/Y Growth 8.1% 21.6% 55.2% 51.0% 33.5% 20.9% 72.2% 47.4% -33.9% -42.7% -37.2% -67.7% -49.9% 12.2%
Non-GAAP Operating Incom e (Loss) 92,481 114,601 149,404 42,758 42,802 40,828 33,151 156,239 36,538 36,667 37,985 40,283 146,038 165,101 13%
Non-GAAP Operating M argin 29.6% 30.4% 31.0% 32% 31% 29% 23% 27.9% 27% 27% 26% 27% 26.0% 26.1%
Y/Y Growth 13% 24% 30% 20% 14% 7% -13% 5% -15% -14% -7% 22% -7% 13%
Non-GAAP Net incom e/(loss) 77,569 94,351 122,742 33,118 34,039 31,751 24,880 123,788 25,545 28,139 32,141 34,132 119,957 138,839 14%
Non-GAAP Net margin 25% 25% 25% 24% 25% 22% 17% 22% 19% 21% 22% 23% 21% 22%
Weighted average number of shares (Diluted) 9,561 9,603 9,650 9,715 9,695 9,676 9,698 9,696 9,689 9,675 9,685 9,695 9,686 9,720
Non-GAAP Diluted EPS 8.113 9.729 12.689 3.415 3.504 3.269 2.547 12.698 2.620 2.896 3.319 3.521 12.385 14.284 14%
Y/Y Change 19% 20% 30% 21% 12% -1% -25% 0% -23% -17% 2% 38% -2% 15%
EBITDA 110,404 137,268 170,680 49,355 44,567 42,683 36,568 173,173 38,283 38,628 42,310 44,836 164,057 193,643 12%
Equity-settled SBC 7,869 10,127 12,634 3,572 5,780 6,574 5,699 21,625 7,819 6,040 7,047 7,294 28,201 22,107
Adjusted EBITDA 118,273 147,395 183,314 52,927 50,347 49,257 42,267 194,798 46,102 44,668 49,358 52,130 192,258 215,751 14%
Y/Y Growth 23% 25% 24% 17% 15% 3% -9% 6% -13% -11% 0% 23% -1% 12%
Adjusted EBITDA M argins 37.8% 39.1% 38.0% 39.1% 36.4% 34.6% 29.3% 34.8% 34.0% 33.3% 34.3% 35.0% 34.2% 34.2%
Y/Y bps -249 bps 124 bps -104 bps -270 bps -166 bps -354 bps -550 bps -325 bps -509 bps -309 bps -28 bps 570 bps -58 bps -4 bps
Capital Expenditure 23,941 32,369 33,960 7,734 6,936 7,061 11,661 33,392 6,971 3,015 8,629 8,932 27,547 37,898
% of revenue 7.7% 8.6% 7.0% 5.7% 5.0% 5.0% 8.1% 6.0% 5.1% 2.2% 6.0% 6.0% 4.9% 6.0%
Dep.+Amor. 34,039 44,577 50,531 14,217 14,473 14,233 14,747 57,670 15,936 14,926 14,957 15,482 61,301 65,690
% of revenue 10.9% 11.8% 10.5% 10.5% 10.5% 10.0% 10.2% 10.3% 11.8% 11.1% 10.4% 10.4% 10.9% 10.4%

Source： Company reports, US Tiger Securities Research

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US TIGER Equity Research Ratings Distribution

BUY HOLD SELL

US TIGER Equity Research Coverage 73% 27% 0%

US TIGER IB clients* 100% 0% 0%

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 Explanation of Equity Research Ratings and Analyst Coverage Universe

Explanation of sector ratings: "OUTPERFORM", the industry index is expected to outperform the benchmark (S&P 500); "NEUTRAL", Performance of the industry index
is expected to be in line with the benchmark (S&P 500); "UNDERPERFORM", the industry index is expected to underperform the benchmark (S&P 500).

Explanation of stock ratings: "BUY" indicates analyst perceives absolute return of 20% or more within 12 months; "HOLD" +20%~-20%; "SELL" -20% and below.

Coverage Universe – <Bo Pei>: < Alibaba Group Holding Ltd., NYSE: BABA, BUY
Baidu, Inc., Nasdaq: BIDU, BUY

Bilibili, Inc., Nasdaq: BILI, BUY

Coinbase Global Inc., Nasdaq: COIN, HOLD

iQIYI, Inc., Nasdaq: IQ, HOLD

JD.com, Inc., Nasdaq: JD, BUY

Li Auto, Inc., Nasdaq: LI, BUY

NIO Inc., NYSE: NIO, BUY

Pinduoduo, Inc., Nasdaq: PDD, HOLD

Tencent Holdings Ltd., HKEX: 0700, BUY

XPeng, Inc., NYSE: XPEV, BUY>

Company-Specific Disclosures

Price Chart(s):
1/14/22 4/11/22 8/17/22
Tencent Holdings Ltd. (700-HK) BUY: HK$590 BUY: HK$475
5/18/22
BUY: HK$380
BUY: HK$400
800
11/10/21
700
BUY: HK$600
600

500

400

300

200 10/13/21
I: BUY: HK$620
100
3/23/22
0 BUY: HK$480

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