Tencent virus shutdown gains may not last, analyst says

Business | 15 May 2020 4:49 pm

Morningstar predicts that strong first-quarter results for Tencent (0700) generated from more leisure time spent at home due to the virus shutdowns will not continue for the rest of the year.

Also, Galaxy Entertainment (0027) is expected among the first batch to benefit from a recovery in the casino industry.

"The stronger growth in Tencent's online games amid the coronavirus wouldn’t materially accelerate long-term user adoption due to the already large user base, and we expect strong online games grossing attributed to the virus to completely normalize in early May," Chelsey Tam, Morningstar’s senior equity analyst, wrote in the latest report.

Meanwhile, Tencent also recorded a 32 percent year-on-year growth in advertising revenue in the first quarter, ahead of analysts' expectations, and they do not expect such a favorable mix shift will continue as the pandemic situation normalizes.

Morningstar maintained its target price of HK$460 per share for Tencent, viewing the shares as fairly valued.

For the Macau casino operator, Tam predicts Galaxy Entertainment management had said the possibility of delaying the opening of Galaxy Macau phase three to mid-2021 from early 2021, depending on the coronavirus development, and the number of rooms and villas for phase three and four had been revised to 3,500 this quarter from 4,000 previously.

Tam thinks this means more focus on higher-quality and larger rooms, which is in line with the current market trend and competitors’ strategies.

The analysts maintained Galaxy’s fair value estimate at HK$62 per share, saying the shares are undervalued as its long-term growth has not been priced in.

"Galaxy should be one of the first operators to benefit from the recovery led by the higher-end segments," says Tam. "Galaxy had a 48 percent VIP revenue exposure in 2019, just 1 percent lower than the VIP leader Wynn Macau (1128). Galaxy is our best idea, due to its strong balance sheet, the opening of Galaxy Macau phase three and four starting 2021, the development of non-gaming facilities, and its ownership by Chinese businessmen amid license renewal in 2022 and escalating tension between the United States and China."


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