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Bull of the Day: Tencent (TCEHY)

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Tencent Holdings Ltd. (TCEHY - Free Report) just reported one of its strongest quarters ever. This Zacks Rank #1 (Strong Buy) is at the top of the heap among China's Internet giants.

Tencent is one of China's leading online gaming and media companies. However, it has been expanding its business in other key areas, including mobile payment with Weixin Payment, and the Cloud.

It now has a market cap of $411 billion, putting it up near the largest companies on the planet.

A Huge Second Quarter

On Aug 16, Tencent reported second quarter and first half results. It beat the Zacks Consensus by 2 cents reporting $0.23 versus $0.21.

Second quarter revenue rose 59% to $8.4 billion with net profit up 45%.

The quarter was boosted by growth in Weixin Payment, Cloud and AI technologies.

Online gaming is its bread and butter, however, and it rose 39% primarily due to its smart phone games. This was the first quarter in the company's history that mobile game revenue exceeded PC game revenue.

Social network revenue jumped 51% as WeChat, its social messaging app, saw a 20% gain in active monthly users to 960 million.

Online ad revenue was up 55% due to higher traffic to Tencent video.

Gross margin was the one weak area, as it fell to 50% from 57.3% a year ago due to investments in video and other new emerging technologies.

Estimates Move Higher

It's not surprising, given the great quarter, that full year estimates are already on the move higher.

The 2017 Zacks Consensus Estimate jumped to $1.03 from $0.94 in the last week. That's an astounding earnings growth of 61% year-over-year.

Analysts are equally bullish on 2018, as they see another year of double digit earnings growth, up 29%.

Shares Soar in 2017

The big gains from Chinese Internet companies in the first half of the year are a sign that the Chinese economy is re-awakening.

Shares of Tencent are up 73% year-to-date.

It trades with a forward P/E of 42 but you're buying a growth stock here, not a value.

Interestingly, it is the only Chinese tech giant that pays a dividend, which currently yields just 0.2%. That might be low, but it is saying something that it is giving back at least a token to shareholders.

If you want to know more about where Tencent fits in in China, listen in on this podcast discussion about what Chinese Millennials are buying in China. It may change your mind about how to invest in China, and which companies to invest in.

For those looking for a Chinese play on the Internet, social media, the Cloud, gaming and mobile payments, there really is no one better than Tencent. It should be on your short list.

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