Fitch over het intact houden van de kredietrating van Tencent. Houden rekening met single-digit growth in 2022 (!), met mid-teens growth in 2023 & 2024..
NON-RATING ACTION COMMENTARY
Improvement in Tencent’s Rating Headroom Slows
Sun 03 Apr, 2022 - 22:53 ET
Fitch Ratings-Hong Kong-03 April 2022: Improvement in Tencent Holdings Limited’s (A+/Stable) rating headroom will be more gradual than expected, as its deleveraging is disrupted by slower economic growth and tighter regulation in China, says Fitch Ratings.
Tencent’s rating headroom is lower and more reliant on its EBITDA growth, M&A spending and control over total debt growth than that for Alibaba Group Holding Limited (A+/Stable). We expect Tencent’s FFO leverage to stay above 1.7x and the company to remain in a net debt position until 2024. Nevertheless, we believe Tencent’s longer-term growth and cash generation prospects remain bright.
Fitch expects Tencent and other Chinese internet companies to face heightened pressure on profitability and FCF generation in 2022, especially in 1H22. We see Tencent’s revenue growth slowing to the high single digits in 2022, before accelerating to the mid-teens in 2023 and 2024. Tencent’s revenue growth decelerated to 11% yoy in 2H21 from 23% in 1H21.
Tencent will see the full-year impact of recent regulatory tightening in 2022. The implementation of measures to protect minors in online games and the temporary halt in monetisation licences for new games will slow games-revenue growth to the mid-single digits in 2022. Tencent’s games-revenue growth slowed to 9% yoy in 2H21, from 15% in 1H21. We expect its games-revenue growth to bottom out in 1H22, as it shifts more resources from implementing measures to protect minors to operating and enhancing game content, which should rejuvenate games revenue from 2H22.
Advertising revenue will remain weak in 2022 due to tougher regulatory environments for advertisers in some sectors, such as education, games and insurance. Pandemic controls and a weak property market also weigh on consumer sentiment, while the job markets in the education, internet and property-related sectors have been adversely affected by the continued regulatory crackdowns. Advertising revenue will take a few quarters to recover and will likely return to growth only in 4Q22, supported by government stimulus to revitalise China’s economy.
We expect Tencent’s margin to remain under pressure and EBITDA to decline slightly in 2022. Tencent’s adjusted EBITDA dropped 3% yoy in 2H21, with the adjusted EBITDA margin narrowing to 32% (2H20: 36%). However, the company is tightening control over marketing and staff costs and rationalising non-core businesses. Benefits from these initiatives should become more apparent from 2H22 and bode well for margins and EBITDA growth in 2023.
Tencent’s M&A spending may remain high, but we expect it to taper off as the current challenges facing the Chinese internet sector will reduce investment opportunities and valuations. Nevertheless, we expect the company to distribute FCF to shareholders rather than use it for deleveraging. The divestment of its stake in JD.com Inc. via a distribution in specie to shareholders did not reduce leverage. Moreover, Tencent has stepped up share buybacks, with the amount in 1Q22 reaching about HKD3.7 billion, exceeding the total spent on share buybacks in 2021.
We may consider negative rating action if there is evidence of more regulatory intervention that leads to an adverse change in Tencent’s operations, profitability or market share, or a major loss of market share in its key products and services. We may also downgrade the rating if there is a sustained decline in operating cash flow or a shift to more aggressive financial policies that result in, for example, a sustained period of net debt or FFO gross leverage above 1.7x. However, in itself, FFO gross leverage rising above this level is not likely to lead to a downgrade if Tencent can maintain a strong net cash position and high FCF margin.