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Research Report

25/09/2020 17:55

No impact on Tencent's ratings from US WeChat measures

[ET Net News Agency, 25 September 2020] Moody's Investors Service said that the US
Commerce Department's announced prohibition on the distribution and operation of the
WeChat mobile application (the app) has no immediate impact on the A1 issuer and senior
unsecured ratings or stable outlook of Tencent Holdings Limited (00700), the app owner.
The announcement follows US President Trump's executive order signed on 6 August on the
threat posed by WeChat, over concerns that the app captured information from US consumers.
"The potential ban is limited to the distribution and operation of WeChat within the US,
while Tencent according to its 2019 annual report generates 96% of its revenue in mainland
China. This means that it generates less than 4% of revenue from markets outside mainland
China and an even lower portion from the US, greatly minimizing the impact," said
Lina Choi, a Moody's Senior Vice President.
"In addition, Tencent has strong financial metrics for its A1 ratings that allow it to
absorb the potential impact of the ban, with adjusted debt/EBITDA below 2x and a robust
cash position," added Choi.
The prohibition, announced on 18 September, covers the provision of internet hosting
services, content delivery network services, directly contracted or arranged internet
transit or peering services, and utilization of the mobile app's constituent code,
functions or services, all within the US.
While the prohibition was supposed to take effect on 20 September, its implementation
has been halted by an injunction. It is uncertain if and when the prohibition will come
into effect.
On 20 September, Tencent announced that it continues to discuss with the US government
and other stakeholders in the US to work towards a long-term resolution.
Tencent's revenue has grown 37% on average annually since 2015, while its adjusted
EBITDA has grown by an average annual 34% over the same period. This strong performance is
driven by the company's leading position in China's integrated internet services market in
China, its large customer base and strong monetization ability.
Moody's expects Tencent's revenue growth and margins will remain solid this year. The
company's adjusted debt/EBITDA was 1.8x as of 30 June 2020 and it held cash and cash
equivalents of RMB260.0 billion, including term deposits and treasury investments of
RMB86.2 billion. Moody's expects these strong metrics will remain largely intact over the
next 12-18 months.
Moody's will continue to closely monitor the ongoing developments around this event and
the potential impact on Tencent's credit profile. (KL)

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