On August 7, the US, citing the possibility of WeChat capturing personal and proprietary information of users in the US, asked that anyone is banned from conducting any WeChat-related transactions with Tencent and its companies for 45 days from the date of the order.
Tencent responds to US ban and says it is assessing its impact
Tencent's share price fell as much as 10 percent on August 7 during the trading session and closed down by more than 5%, after the news was released. On Monday, Tencent's shares went down by another 4.8 percent.
However, in the opinion of Guosen Securities analysts, the impact of the WeChat ban on Tencent's social ecology and revenue will be minimal.
Based on the information available, it is unlikely that the US will restrict the availability of WeChat on China's App Store and ban Tencent from independently publishing games in the US, the analysts said.
In the event of an extreme situation, PUBG Mobile's operations in the US could be affected, with the impact on Tencent's 2020-2022 Non-GAAP net profit being 1.1%, 1.0%, and 0.8%, respectively.
Tencent's current share price performance reflects the market's concern over the unknown, and the company's long-term logic has yet to be affected.
Guosen Securities maintained its previous earnings forecast, estimating Tencent's 2020-2022 Non-GAAP net profit to be 121.4, 149.8, and 180.5 billion yuan, respectively.
These analysts also maintain a target price of HK$520-566 for Tencent and continue to maintain a "buy" rating.
The following is the full text of their reports.
How much does the US blocking of WeChat affect Tencent?
In September 2019, the number of active WeChat users in the US was just 0.13% of the total number of WeChat users in the same period.
According to Statista, WeChat had 1.48 million users in the US in September 2019, accounting for only 0.13% of the combined WeChat and WeChat user base in the same period.
US social products Facebook Messenger, Snapchat, and WhatsApp dominate, with a more significant head effect.
We judge that even if WeChat is completely banned in the US, the impact on Tencent's social ecosystem will be limited.
We estimate that non-game revenue in the US will only account for 0.4% of Tencent's total revenue in 2019.
Even if WeChat exits the US market, the impact on the ecosystem and the profit side will be minimal.
It is worth noting that the original text of the ban reads "Prohibit transactions with Tencent related to WeChat", rather than prohibiting the use of WeChat in the US.
This means that overseas companies may be banned from advertising on WeChat, and individual users may be banned from using WeChat to make payments, which could affect WeChat's commercialization overseas.
The US move may force WeChat to actively withdraw from the US market.
In 2019, Tencent's total overseas revenue was 16.7 billion yuan, and we estimate that overseas game revenue exceeded 14 billion yuan or about 2.7 billion yuan in overseas non-game revenue including advertising.
Tencent's total revenue in 2019 was 377.3 billion yuan, and assuming that 60% of overseas non-game revenue comes from the US, US non-game revenue in 2019 accounted for only 0.4% of the company's total revenue.
In the short term, the ban will have very little impact on the company's profits.
Will this event affect Tencent Games in the US?
According to the Los Angeles Times, White House officials said the presidential order is limited to WeChat and WeChat-related companies and does not involve Tencent-owned gaming companies.
As a result, Riot's "League of Legends" and Epic's "Fortnite" are currently unaffected.
In terms of collecting user information, Tencent's games in the US are mostly co-published by partners it has invested in, with Tencent playing more of a "developer" role.
Only PUBG Mobile is published globally by Tencent, while CODM is published by Activision Blizzard, and League of Legends is published by Riot Games.
Chinese game companies rely heavily on local app stores for distribution, as well as Facebook and Google for marketing.
When logging in, users tend to use the account systems of local US companies such as Facebook, Apple, and Google Play, which means that Tencent has little access to information from local users.
"Localization" is one of the principles that most Chinese games follow when they go overseas.
Tencent's leading games in the US, such as PUBG Mobile and CODM, are all overseas IPs, and cannot play a role in exporting culture or guiding public opinion.
Therefore, we judge that the US lacks the motivation to ban Tencent's games.
Under extreme circumstances, how much impact will the US ban have on Tencent's game performance?
According to the LA Times, the operations of Riot Games and Epic Games, Tencent's US-based game companies, are currently unaffected.
In the case of vague definitional boundaries and unclear standards, we do not rule out the possibility of expanding the scope of reach in the future, such as prohibiting Tencent from independently distributing games in the United States.
In the event of such extreme circumstances, we presume that Tencent could still continue to legally operate in the US market by seeking representation from US game publishers and setting up overseas distribution entities in the US or other countries.
However, Tencent's share of the game's revenue may be reduced.
In an extreme case, the current head-to-head overseas game PUBG Mobile could be affected.
According to our model, PUBG Mobile will account for only 1% of Tencent's total revenue and profit in 2020-2022.
In our current profit forecast, Tencent's games in the sea mainly consist of PUBG Mobile, CODM, LOL, Dragon Fantasy and other head-to-head content, with strong head-to-head effects.
Among them, CODM will be published by Activision Blizzard in the US, LOL will be published by Riot Games in the US, and Dragon Fantasy will be mainly targeted at Japan.
We estimate that PUBG Mobile will earn about $1.2, $1.3, and $1.3 billion in 2020-2022 in overseas territories.
Assuming that the game accounts for 60% of the revenue in the US, its impact on Tencent's revenue from 2020-2022 will be 1.0%/0.9%/0.7%, and its impact on net profit under Non-GAAP will be 1.1%, 1.0%, and 0.8%, respectively.
Will WeChat's downloads and usage in the App Store in China be affected?
We think this is relatively unlikely.
If WeChat is removed from the App Store in China, Apple could be the first to be affected.
As we all know, WeChat is an irreplaceable social network of acquaintances in China.
As of 2020Q1, WeChat and WeChat have more than 1.2 billion combined active users, most of whom are in China.
Apple's mobile phones are more substitutable, and Questmobile data shows that in 2020H1, Apple's mobile phones accounted for only 21.6% of the monthly active number in each category of smartphones in China.
In 2019, Apple's share of revenue in China is about $43.7 billion, or about 17 percent of its total revenue.
For the vast majority of consumers, the value of the social chain that WeChat deposits are far greater than Apple's.
If WeChat were to be banned from the App Store in China, we suspect that most users would abandon their iPhones.
Ming-Chi Kuo: US WeChat ban could cause iPhone shipments to fall by up to 30%
In such a scenario, Apple would likely be hit first before Tencent.
The impact on Tencent is relatively small at the moment and has yet to affect its long-term growth logic, so there is no need to panic.
From the above analysis, we can see that the actual impact of the WeChat ban on Tencent's social ecosystem and revenue in the US is minimal.
Based on the information available, it is unlikely that the US will restrict the availability of WeChat on the Chinese App Store or ban Tencent from publishing games in the US
Naturally, the definition of "transaction" for purposes of the ban is very vague.
Whether or not the ban is violated is ultimately up to the US government to interpret, and we can't rule out the possibility that the situation could worsen.
In the event of an extreme situation, PUBG Mobile's operations in the US could be affected.
In the pessimistic scenario, the impact on Tencent's 2020-2022 Non-GAAP net profit is expected to be in the range of 1.1%/1.0%/0.8%, respectively.
The company's long-term logic has not yet been affected, and the profit safety cushion remains sufficiently generous.
We maintain our previous profit forecasts and expect Tencent's 2020-2022 Non-GAAP net profit to be 121.4, 149.8, and 180.5 billion yuan, respectively. Maintain Tencent's target price of HK$520-566, corresponding to 2021 PE of 30-33 times, continue to maintain a "buy" rating.