Fitch Rates Tencent’s Proposed US Dollar Notes ‘A+’

Fitch Ratings – Hong Kong – 12 Apr 2021: Fitch Ratings has assigned China-based Tencent Holdings Limited’s (A+/Stable) proposed US dollar senior unsecured notes an ‘A+’ rating. The notes will be issued under its USD30 billion medium-term note programme, which has been increased from USD20 billion.

The proposed notes are rated in line with Tencent’s senior unsecured rating of ‘A+’ as they will represent its direct, unconditional, unsecured and unsubordinated obligations and rank at least equally with all its other present and future unsecured and unsubordinated obligations. Proceeds will be used for general corporate purposes.


Strong Performance: Tencent’s solid business profile is supported by service innovation, which enhances user engagement and improves monetisation. Its profit and cash continued to surge, with 2020 revenue rising by 28% yoy, operating EBIT increasing by 32%, and net cash flow generated from operating activities gaining 31% to CNY194 billion. Major user metrics remained solid, with 5% yoy increase in combined Weixin and WeChat monthly active users and 22% increase in fee-based value-added service subscriptions in 2020.

Sustained Solid Growth: We expect sustainable solid revenue from Tencent’s online game segment in the next few years, underpinned by its strong game pipeline and performance of its existing game titles. We also expect rising overseas online game revenue contribution. International online game revenue rose 43% yoy in 4Q20, contributing about 21% of total game revenue, including game revenue booked under social networks revenue.

Social advertising revenue may rise further, outpacing the industry, driven by continued recovery in the Chinese economy, more customised in-app advertising solutions, strengthening mobile advertising network, and increasing video advertising and music app monetisation. We also expect solid growth in fintech and cloud services. iResearch expects a CAGR of 35% for China’s cloud service sales in 2019-2023 and a CAGR of 15% and 14% for China’s mobile-payment and digital wealth-management income, respectively, in 2019-2022.

Robust Profitability: We expect Tencent to maintain high profitability in the next few years due to its market leadership, large economies of scale, and continued innovation to improve monetisation. Its operating EBIT margin remained stable, at 29% in 2020 (2019: 28%), thanks to higher revenue from self-developed smartphone games, exemption of cultural construction fees for the advertising business and improved contribution from wealth management and payment-related services.

Modest Leverage: We expect Tencent’s FFO gross leverage to be around 1.5x in the next few years, underpinned by robust EBITDA growth and strong free cash flow (FCF) generation. We expect Tencent to maintain a high M&A appetite in the medium term, but its FCF should be sufficient to fund its ambitions, improving its ability to manage leverage and allowing it to reinvest in its businesses and ecosystem to expand market leadership. Robust FCF generation has enabled Tencent to return to a net cash position since end-June 2020.

Tighter Fintech Regulations: We expect China’s fintech regulatory environment to continue to evolve to address the sector’s rapid development, which may have an impact on Tencent’s fintech business. However, Tencent’s emphasis on risk control and focus on cooperation with financial institutions for the fintech business should help mitigate the risk. Its credit strength is not likely to be hurt significantly as it has a strong business profile, high FCF generation, and ample liquidity with a conservative capital structure and a net cash position.

Tencent may need to revamp its fintech business into a financial holding company, which should be largely neutral to the operations and not a major structural obstacle, while the potential financial impact should be manageable. The 30% self-funding ratio requirement for any loan funded jointly by an online micro-lender and banks should also have a limited impact, as most of Tencent’s loan business is conducted through its 30%-owned associate, WeBank Co., Ltd., which complies with banking regulations that are more stringent than those on micro-lending.

Regulatory Risks Well-Managed: We expect Tencent to continue to maintain a healthy relationship with China’s government and regulatory authorities. However, a change in the position could affect its credit strength due to government restrictions on foreign ownership in internet businesses in China, particularly considering Tencent’s absence of equity control over its onshore operating companies, such as Tencent Computer, Shiji Kaixuan and other consolidated affiliated Chinese entities with which it only has contractual relationships.


Tencent’s credit profile compares favourably with that of internet peers such as eBay Inc. (BBB/Positive), Expedia Group, Inc. (BBB-/Negative) and Baidu, Inc. (A/Stable), and is at a similar level to that of Alibaba Group Holding Limited (A+/Stable).

Tencent’s cash-generation ability is stronger than that of Baidu, but similar to that of Alibaba. Tencent’s ratings benefit from its diversified – but synergistic and integrated – platforms with market leadership across multiple segments. This is unlike Alibaba and Baidu, whose ratings benefit from their dominance in China’s online shopping and search engine markets, respectively. The popularity of Tencent’s Weixin services has further enhanced the company’s platform strength in mobile and provides opportunities to capture new business.

Tencent’s ratings are at the same level as, and therefore not constrained by, China’s Country Ceiling. The ratings are similarly not constrained by our assessment of the company’s operating environment at ‘bbb+’, which is the highest possible in China.


Fitch’s key assumptions within our rating case for the issuer:

– Continued market leadership in online games, communication and social services, and social advertising in China

– Rapid revenue growth with a CAGR of 16% from 2020 to 2024 (2020: 28%)

– Changing sales mix to dilute the operating EBIT margin to 25%-28% in 2021-2024 (2020: 29%)

– Capex/revenue of 8%-13% in 2021-2024 (2019: 15%)

– Annual expenditure on M&A and investments to remain high

– Dividend payout ratio to remain at 10%-15% in 2021-2024 (2020: 9%)


Factors that could, individually or collectively, lead to positive rating action/upgrade:

– Positive rating action is unlikely in the medium term, even taking into account Fitch’s expectation of profit growth. The agency may consider an upgrade if the company develops businesses that diversify cash generation significantly away from operations that are subject to Chinese government and regulatory risk.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Evidence of greater government, regulatory or legal intervention leading to an adverse change in the company’s operations, profitability or market share

– Major loss of market share in key products and services

– Significant M&A that negatively affects the operations or the business profile

– Decline in operating cash flow for a sustained period

– A shift to more aggressive financial policies that result in, for example, a sustained period of net debt or FFO gross leverage above 2.0x. However, in itself, FFO gross leverage rising above this target is unlikely to lead to a downgrade if the company retains its strong net cash position and high FCF margin.


International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit


Strong Liquidity: We expect Tencent to maintain strong liquidity and a net cash position in the medium term. Readily available cash of about CNY260 billion at end-2020 exceeded total reported debt of about CNY248 billion. We also expect annual FCF to exceed CNY100 billion in the next few years. In addition, the fair value of Tencent’s stakes in listed investee companies (excluding subsidiaries) totalled CNY1,205 billion at end-2020, which could provide liquidity headroom, if required.



The principal sources of information used in the analysis are described in the Applicable Criteria.


Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores.


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