Research on Tech Companies

Evelyn Zhang

Thematic (Sector/Industry)

<ul>
<li>The gaming sector is not the focus of Chinese regulators. Current regulations focus on protecting minors from addiction, limiting playing time, IDing minors, and in-game payments</li>
<li>In worst case scenario, if regulators introduce more stringent policies, there would be little impact on gaming companies’ revenue. In 4Q20, only 6.0% and 3.2% of <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> ’s China online games gross receipts came from minors aged under 18 and under 16, respectively. We expect <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>  to have similar gross receipts breakdown.</li>
<li>I think <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a> will benefit from Anti-trust law on Cloud Music, especially after government injunction ordering <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>  to lift exclusive copyright of online music </li>
</ul>


The gaming sector is not the focus of Chinese regulators. Current regulations focus on protecting minors from addiction, limiting playing time, IDing minors, and in-game payments
In worst case scenario, if regulators introduce more stringent policies, there would be little impact on gaming companies’ revenue. In 4Q20, only 6.0% and 3.2% of Tencent (700 HK) ’s China online games gross receipts came from minors aged under 18 and under 16, respectively. We expect NetEase (9999 HK)  to have similar gross receipts breakdown.
I think NetEase (9999 HK) will benefit from Anti-trust law on Cloud Music, especially after government injunction ordering Tencent (700 HK)  to lift exclusive copyright of online music 


Will Online Games Become the Next Education and Training Industry?

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Granite Bay Capital

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<p>Headline Developments Every week there’s a new deal (or regulation) in gaming.  The Steam Deck, the Epic vs Apple case, China’s regulatory crackdowns (triggering a Tencent and Netease collapse).  Acquisitions ramp up every week (this week alone saw Roblox buy Discord competitor Guilded and Swedish game Holdco Embracer Group snap up three new developers).</p>

Headline Developments Every week there’s a new deal (or regulation) in gaming.  The Steam Deck, the Epic vs Apple case, China’s regulatory crackdowns (triggering a Tencent and Netease collapse).  Acquisitions ramp up every week (this week alone saw Roblox buy Discord competitor Guilded and Swedish game Holdco Embracer Group snap up three new developers).

Global TMT analyst with Asia ex-Japan focus.

Mitchell Kim

Equity Bottom-Up

<p>I have turned more positive on Tencent shares recently (please see <a href="https://www.smartkarma.com/insights/tencent-700-hk-when-to-catch-a-falling-knife" target="_blank" data-smartkarma-citation="insights:55148" rel="noopener">Tencent (700 HK): When to Catch a Falling Knife</a>) after the share price plummeted from the peak in March.  While we may still see some residual regulatory measures rumbling through the China tech industry after the September 1 adoption of the new Data Privacy Law, Tencent's more reasonable value should mitigate further downside risks, in my view. </p><p><em>Three reasons why I am able to exhale comfortably on Tencent: </em></p><ul>
<li>
<strong>Tencent's overall revenue grew 20% YoY. </strong> This growth would normally be mediocre by Tencent's standards, but in comparison to the extraordinary growth year 2020, this is solid.  </li>
<li>
<strong>Fintech business remains unencumbered. </strong> Fintech now makes up 30% of Tencent's total revenues and the segment gross margin was 32%, an increase of 3.1% points. </li>
<li>
<strong>Tencent shares trade at 23.5x FY21 consensus earnings.</strong> This is inexpensive and suggests that at least some of the regulatory risks are priced in.  </li>
</ul><p><strong>The key risk remains on whether Tencent would be required to transfer user data as part of the data privacy law measures.  I do not believe this is the case. </strong>        </p>

I have turned more positive on Tencent shares recently (please see Tencent (700 HK): When to Catch a Falling Knife) after the share price plummeted from the peak in March.  While we may still see some residual regulatory measures rumbling through the China tech industry after the September 1 adoption of the new Data Privacy Law, Tencent's more reasonable value should mitigate further downside risks, in my view. Three reasons why I am able to exhale comfortably on Tencent: 

Tencent's overall revenue grew 20% YoY.  This growth would normally be mediocre by Tencent's standards, but in comparison to the extraordinary growth year 2020, this is solid.  

Fintech business remains unencumbered.  Fintech now makes up 30% of Tencent's total revenues and the segment gross margin was 32%, an increase of 3.1% points. 

Tencent shares trade at 23.5x FY21 consensus earnings. This is inexpensive and suggests that at least some of the regulatory risks are priced in.  
The key risk remains on whether Tencent would be required to transfer user data as part of the data privacy law measures.  I do not believe this is the case.         

Tencent (700 HK): No Longer Roaring, but the Price Is Right

IPO and L/S equity, 2015 Starmine top stock picker, Global Equity Research Ltd

Rickin Thakrar

IPO and L/S equity, 2015 Starmine top stock picker

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<p>We wrote a month ago that Tencent was likely to beat consensus estimates driven by ‘other gains’ (<a href="https://www.smartkarma.com/insights/tencent-is-short-term-risk-reward-more-balanced" target="_blank" rel="noopener">note here</a>). Indeed, Tencent’s 2Q21 beat consensus estimates through a significant gain in ‘other income.’ On the flip side, we believe more questions may be raised about the performance of the core business.</p>

We wrote a month ago that Tencent was likely to beat consensus estimates driven by ‘other gains’ (note here). Indeed, Tencent’s 2Q21 beat consensus estimates through a significant gain in ‘other income.’ On the flip side, we believe more questions may be raised about the performance of the core business.

Tencent 2Q21 Results: Questions About Core Business Remain

ASEAN Insight Provider, CrossASEAN Research

Angus Mackintosh

ASEAN Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> announced yet another record set of quarterly results last night, with +159% growth in total GAAP revenues to US$2,280.6m. This marks the 12th consecutive quarter of triple-digit growth in revenues, which deserves a standing ovation</p>
<p>The company's digital entertainment business continued to thrive, with quarterly active users (QAU) increasing by +45% YoY and importantly quarterly paying users increasing +85% YoY in 2Q2021, and generating positive EBITDA of US$740.9m.</p>
<p>The quarterly paying users represented a higher portion of users in 2Q2021 and Adjusted EBITDA as a portion of bookings improved to 62.8% for 2Q2021 versus 60.9% in 2Q2020.</p>
<p>Garena's self-developed global hit game <em>Free Fire </em>reached over 1bn downloads on Google Play, with the game ranking number three globally by average monthly users for mobile games in 2Q2021, according to App Annie, with record peak daily users.</p>
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<p>The company's e-commerce business continued to see rapid growth with gross orders up by +127% YoY to 1.4bn orders and gross merchandise value up by +87.5% YoY to US$15bn whilst the adjusted EBITDA loss per order decreased by -19.6% YoY.</p>
<p>Shopee was the second most downloaded app on Google Play and the second most downloaded app across Google Play and iOS app stores combined forte shopping category globally in 2Q2021, according to App Annie.</p>
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<p>In Brazil, where Shopee was launched in late 2019, it ranked first in the shopping category by downloads, and total time spent in-app, as well as ranking second in terms of monthly active users (MAU) for 2Q2021.</p>
<p> In Brazil, it has already made good progress with more monthly active users than <a href="https://www.smartkarma.com/entities/amazon-com-inc" target="_blank" data-smartkarma-citation="entities:409:1" rel="noopener">Amazon.com Inc (AMZN US)</a> and <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a> and stands in the number two position after <a href="https://www.smartkarma.com/entities/mercadolibre-inc" target="_blank" data-smartkarma-citation="entities:27954:1" rel="noopener">MercadoLibre Inc (MELI US)</a> in terms of active users.</p>
<p><a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> also continued to make significant progress in digital financial services through the adoption of SeaMoney and ShopeePay, with US$4.1bn in total payment volume in its mobile wallet in 2Q2021, up nearly +150% YoY. It also saw an increase of +109% in quarterly paying users in 2Q2021. </p>
<p>The company continues to grow its ShopeeFood business in Indonesia and Vietnam and has seen a very strong performance and positive reception from users as well as driver communities in both markets in 2Q2021, with a strong focus on the quality of services to users.</p>
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<p>The company booked an overall gross profit increase of +364% YoY. From a non-GAAP EBITDA perspective, the company booked an EBITDA loss of (US$24.1m) versus an EBITDA profit of US$7.7m.</p>
<p>From a segmental point of view, <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> booked a positive EBITDA of US$740.9m for its digital entertainment segment in 2Q2021 versus US436.2m last year in the same period, an increase of +69.8% YoY. </p>
<p>The e-commerce segment booked an EBITDA loss of (US$579.8m) in 2Q2021 versus a loss of (US$313.7m) last year, an increase in loss of +84.8% YoY.</p>
</section>
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<section class="figure">These look like yet another blow away set of numbers for <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>, despite the company booking a marginally higher loss. It is all too easy to take a negative view on a high-growth company such as <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a> but most negative arguments from analysts tinker with the quarterly minutiae and are somehow blind to the longer-term positive story and the company's growth model.</section>
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<section class="figure">Management has also raised its full-year guidance, which is now well above analyst expectations. The stock reacted positively to the results breaking out above US$300 to close at a new record close. We remain positive on <a href="https://www.smartkarma.com/entities/sea-ltd" target="_blank" data-smartkarma-citation="entities:8509:1" rel="noopener">Sea Ltd (SE US)</a>, which now trades on 10.5x FY22E EV/Sales and 8x FY23E EV/sales, which may look rich but is justified by superior growth to its peers, with e-commerce and digital finance fuelled by the company's gaming business. </section>
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Sea Ltd (SE US) announced yet another record set of quarterly results last night, with +159% growth in total GAAP revenues to US$2,280.6m. This marks the 12th consecutive quarter of triple-digit growth in revenues, which deserves a standing ovation
The company's digital entertainment business continued to thrive, with quarterly active users (QAU) increasing by +45% YoY and importantly quarterly paying users increasing +85% YoY in 2Q2021, and generating positive EBITDA of US$740.9m.
The quarterly paying users represented a higher portion of users in 2Q2021 and Adjusted EBITDA as a portion of bookings improved to 62.8% for 2Q2021 versus 60.9% in 2Q2020.
Garena's self-developed global hit game Free Fire reached over 1bn downloads on Google Play, with the game ranking number three globally by average monthly users for mobile games in 2Q2021, according to App Annie, with record peak daily users.

The company's e-commerce business continued to see rapid growth with gross orders up by +127% YoY to 1.4bn orders and gross merchandise value up by +87.5% YoY to US$15bn whilst the adjusted EBITDA loss per order decreased by -19.6% YoY.
Shopee was the second most downloaded app on Google Play and the second most downloaded app across Google Play and iOS app stores combined forte shopping category globally in 2Q2021, according to App Annie.

In Brazil, where Shopee was launched in late 2019, it ranked first in the shopping category by downloads, and total time spent in-app, as well as ranking second in terms of monthly active users (MAU) for 2Q2021.
 In Brazil, it has already made good progress with more monthly active users than Amazon.com Inc (AMZN US) and Alibaba Group (BABA US) and stands in the number two position after MercadoLibre Inc (MELI US) in terms of active users.
Sea Ltd (SE US) also continued to make significant progress in digital financial services through the adoption of SeaMoney and ShopeePay, with US$4.1bn in total payment volume in its mobile wallet in 2Q2021, up nearly +150% YoY. It also saw an increase of +109% in quarterly paying users in 2Q2021. 
The company continues to grow its ShopeeFood business in Indonesia and Vietnam and has seen a very strong performance and positive reception from users as well as driver communities in both markets in 2Q2021, with a strong focus on the quality of services to users.


The company booked an overall gross profit increase of +364% YoY. From a non-GAAP EBITDA perspective, the company booked an EBITDA loss of (US$24.1m) versus an EBITDA profit of US$7.7m.
From a segmental point of view, Sea Ltd (SE US) booked a positive EBITDA of US$740.9m for its digital entertainment segment in 2Q2021 versus US436.2m last year in the same period, an increase of +69.8% YoY. 
The e-commerce segment booked an EBITDA loss of (US$579.8m) in 2Q2021 versus a loss of (US$313.7m) last year, an increase in loss of +84.8% YoY.


These look like yet another blow away set of numbers for Sea Ltd (SE US), despite the company booking a marginally higher loss. It is all too easy to take a negative view on a high-growth company such as Sea Ltd (SE US) but most negative arguments from analysts tinker with the quarterly minutiae and are somehow blind to the longer-term positive story and the company's growth model.




Management has also raised its full-year guidance, which is now well above analyst expectations. The stock reacted positively to the results breaking out above US$300 to close at a new record close. We remain positive on Sea Ltd (SE US), which now trades on 10.5x FY22E EV/Sales and 8x FY23E EV/sales, which may look rich but is justified by superior growth to its peers, with e-commerce and digital finance fuelled by the company's gaming business. 














China

Tencent Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides Internet and mobile value-added services (VAS), online advertising, and e-commerce transactions. Tencent Holdings offers services to users worldwide.

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Tencent Holdings (ADR) (TCEHY US)

Will Online Games Become the Next Education and Training Industry?

Beat the stamped or buy the dip? When the Chinese gaming stocks nosedived following Xinhua’s Spiritual Opium article, I argue that Gaming industry...

Evelyn Zhang

Weekly Innovation Review (WIRE) #45

Headline Developments Every week there’s a new deal (or regulation) in gaming. The Steam Deck, the Epic vs Apple case, China’s regulatory...

Granite Bay Capital

Tencent (700 HK): No Longer Roaring, but the Price Is Right

Tencent's engine is no longer roaring but current valuations appear reasonable enough to weather through the regulatory uncertainty. 2Q was a...

Mitchell Kim

Tencent 2Q21 Results: Questions About Core Business Remain

We wrote a month ago that Tencent was likely to beat consensus estimates driven by ‘other gains’ (note here). Indeed, Tencent’s 2Q21 beat estimates...

Rickin Thakrar

Sea Ltd (SE US) - Standing Ovation

Sea Ltd released another record quarterly result affirming its leading position in gaming and e-commerce in SE Asia, with some positive signals...

Angus Mackintosh

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