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Bull of the Day: Tencent Holdings (TCEHY)

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Over the past few years, several notable Chinese internet stocks have exploded in popularity, creating a new sub-industry for many investors here in the U.S. looking to add exposure to China’s growing tech infrastructure to their portfolios. Of these, Tencent Holdings (TCEHY - Free Report) has emerged as one of the strongest options right now.

Tencent is one of the world’s largest internet and technology companies. Its services include social networks, instant messaging, music, e-commerce, mobile gaming, and much more. Its major messaging platforms, Tencent QQ and WeChat, are dominant in the industry, and its investments in AI, cloud computing, and retail have set the company up for continued growth.

Earnings estimates for Tencent have moved higher recently, helping the stock earn a Zacks Rank #1 (Strong Buy). This improved outlook, on top of the company’s strong growth catalysts, make TCEHY a top Chinese internet pick.

Latest Outlook

Tencent is slated to announce its latest quarterly earnings results in late March. Based on our current consensus estimates, the company is projected to post adjusted earnings of 29 cents per share and total revenues of $11.00 billion. These results would represent year-over-year growth of 52.6% and 71.4%, respectively.

Tencent’s projected Q4 results are expected to lift the company’s full-year earnings per share to $1.06, up 47.2% on a year-over-year basis. Looking ahead, our consensus estimates are calling for Tencent to expand its bottom line by an additional 34.0% in fiscal 2018. What’s more, the company is expected to improve its earnings at an annualized rate of 27.2% over the next three to five years.

Tencent owes its growth prospects to a number of new initiatives. For example, it plans to expand its brick-and-mortar shopping operations through a stake in Carrefour’s China unit. Along with local retailer Yonghui Superstores, Tencent recently signed a term sheet for an undisclosed stake in Carrefour China.

Tencent’s partnership with Yonghui would allow the social media and mobile gaming giant to pair its technology with the domestic retailer’s shopping expertise in order to improve Carrefour’s mobile payments and data analysis. Tencent previously signaled its intention to enter the Chinese retail market with its $638 million investment in Yonghui.

Earnings Estimate Revisions

Investors should note that these Chinese tech stocks often see less analyst coverage, which might explain the limited number of estimate revisions here. Nevertheless, what we really care about is that estimates are moving higher and no negative revisions are coming in. The improved outlook for fiscal 2018 is especially encouraging as we move beyond the company’s Q4 report.

Other Key Metrics

On top of its improved earnings outlook, Tencent presents a number of interesting growth metrics. The company is generating cash flow growth of 39.3% right now, outpacing its historical rate of 33.4%. Meanwhile, Tencent’s net margin of 28.4% comes in well ahead of its “Internet – Services” industry average, and its RoE of 24.5% also outperforms its peer group.

At 41x forward earnings, Tencent shares are hardly cheap, but true value opportunities in the Chinese internet space are few and far between. TCEHY is an explosive growth stock, and despite its lead in many of China’s internet markets, the company has plenty of room for further expansion.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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