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Key Beneficiary Of Future Metaverse Ecosystem

Tencent has rebounded almost 25% since its low in Aug 21, reflecting that the impact of the regulatory changes has been priced in at the current stage. Although Tencent is still facing the trough regulation environment, including cybersecurity, under-aged user protection and the antitrust regulations storm, we believe Tencent’s overseas games,
unique position in the metaverse, WeChat+QQ ecosystem and SaaS+Cloud still have strong product advantages. We maintain BUY with a higher target price of HK$588.00.

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WHAT’S NEW

• Metaverse is a hot topic now. Tencent’s meta-universe programme will be anchored by its online game and social content and it will increase its investment in next-generation games in the gaming sector. QQ will lead this frontier given its strong presence among millennials with its diversified ecosystem which has the potential to form a meta-universe, such as the QQ show, similar to virtualised avatar. It also provides users with a variety of virtual social scenes, such as QQ study room, party together, video box, QQ group watching the game. In the future, QQ and the gaming business are expected to achieve deep integration. In addition, PCG group has tested the first gaming social product, “NokNok”/”Noisy Community”, which is positioned as a community platform for group chat games, similar to the Discord app, and plans to support cross-end capabilities. Tencent also owns 1.5% of the Metaverse platform Roblox which enables users to create avatars and interact with each other in the virtual world. The company was successfully listed in the US in May 21 and had raised the awareness of the investment fraternity on the next investment theme which promises ample room for growth in the future. Roblox recorded total daily active users (DAU) of 43.2m as at Jun 21, and had successfully forayed into China in 2019 via JV with Tencent.

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• Online game – A key entry point. Tencent is no doubt a front-runner in the concept metaverse as it has been consistently increasing its investments in social media, games, and entertainment in order to improve user experience and retention rate. As content has played a major part in attracting users into the metaverse, we had seen various strategic investments by Tencent in some gaming studios (locally and overseas) to develop triple-A standard online games as well constantly researching on open-world games (ie Lightspeed Quantum, TiMi Studio, TiMi Los Angeles, etc). From the perspective of intensified domestic regulation, we believe Tencent will continue to shift its focus to strengthening its overseas gaming investments. During 2Q21, Tencent’s overseas gaming revenue growth had
surpassed domestic gaming growth (37% vs 9%) driven by solid performance of its existing pipelines (ie HOK and PUBG). According to Newzoo, 78% of Chinese consumers aged 14- 50 are interested in socialising within game vs the US’ 57%, Japan’s 47% and the UK’s 47%, which implies ample room for innovation to capture this market share.