Tencent Bull Case: Buy the Online Community Empire, Not Just a Game Operator

• We believe the online community WeChat is the real main business of Tencent, because WeChat’s user base supports all business lines in Tencent and attracts clients outside Tencent. We believe the game business that the market cares most about is merely one of those businesses based on WeChat’s user base.

• We believe Tencent’s business lines in financial statements are confusing. We re-classify Tencent’s business lines into online community, Video, and Game. Online communities account for 39%~42% of total revenues, more than 29% for game revenues.

• We believe it is the growth rate of WeChat advertising revenues , 44% yoy in 4Q2018, rather than the growth rate of total revenues, 28% yoy, that represents the growth momentum in following years. With the largest user base among all apps in China, we believe WeChat advertising revenues will increase 41% in 2019 and 37% in 2020.

• Mini-program is another direction of expansion. WeChat Pay is a mini-program in WeChat and is the second largest online payment system in China. Tongcheng-Elong (780 HK) has a mini-program in the mini-program WeChat Pay. In 2018, 42% of Tongcheng-Elong’s active users come from WeChat Pay and 80% come from the whole WeChat community.

• We believe the market overly focus on one-time events. For example, the authorities suspended game license approval and the FIFA World Cup took audience from TV series. We notice clear recovery trends in the weakest parts of video and game businesses.

• We believe Tencent’s user base has irreplaceable market power, so we measure Tencent with historical price / earnings ratio. We set the target price HKD457, which is 29% over the market price.

Contents

A. Misconception “Just a Game Operator”

B. Real Main Business - WeChat

C. WeChat Pay - Best In-house Mini-Program of WeChat

D. Online Game - Gained Market Share During Licence Suspension

E. Video Streaming - Main Competitor in Trouble

F. Risks of Social Responsibility and Governance

G. Valuation

H. Appendices