OREANDA-NEWS. June 09, 2015. Fitch Ratings has published Tencent Holdings Limited's (Tencent) Long-Term Foreign-Currency Issuer Default Rating (IDR) and foreign-currency senior unsecured class rating at 'A+'. The Outlook is Stable. Fitch has also assigned senior unsecured ratings of 'A+' to Tencent's existing global medium-term note (MTN) programme and all its outstanding senior unsecured notes. A full list of rating actions is at the end of this release.

KEY RATING DRIVERS

Leadership in Multiple Segments: The ratings reflect Tencent's leading market position in social networking, social media and online games in China. It is also the largest online display advertising company in China. As China's leading social and entertainment platform, Tencent possesses strong competitive advantages, including a large and highly engaged user base with significant network effect, diversified products and services that exhibit strong synergy, leadership in technology and service innovation, and high levels of brand recognition and consumer satisfaction.

Vibrant Ecosystem: The ratings reflect Fitch's belief that Tencent has built a vibrant ecosystem that will strengthen user stickiness, reinforce Tencent's platform leadership and brands, and increase the company's business opportunities. Tencent's ecosystem is built around partnerships. In 2014, Tencent invested in a range of partnerships, which added valuable services and content for its users through social apps Weixin and QQ. Its partners will be able to connect to Tencent's users through its platform-targeting capabilities, and benefit from potential viral marketing as its users recommend the partners' product and services to each other.

Greater Revenue Diversity: The ratings also reflect Fitch's expectation that Tencent's advantages in its markets will translate into stronger online advertising and social network revenue growth, resulting in further revenue diversification away from online games. For example, the company has been successful in starting to monetise performance-based advertising inventory on its social network service Qzone and Weixin/WeChat. In addition, the company is adding more mobile privileges and premium entertainment content for subscription.

Robust Cash Generation: Fitch expects Tencent to maintain robust cash generation. The company has registered uninterrupted revenue growth since inception and maintained high EBITDA margins. Due to its high profitability and modest capex requirements, Tencent generated post-dividend free cash flow (FCF) of CNY26bn in 2014. We expect the FCF margin to exceed 30% in the next two to three years and FCF to be strong enough to fund most of the company's further investments to enhance its ecosystem in the next few years.

Abundant Liquidity: Fitch expects Tencent to continue to generate robust FCF and maintain abundant liquidity in the medium term. Its readily available cash of CNY74bn at end-March 2015 significantly exceeded total debt of CNY49bn. Debt due within one year amounted to only CNY5bn at end-March 2015. In addition, Tencent had CNY74bn worth of listed equity investments in the form of available-for-sale financial assets and associates at end-March 2015, which can be used to provide further liquidity headroom.

Regulatory Risks Well Managed: The ratings also reflect Fitch's expectation of Tencent's continued good relationships with China's government and regulatory authorities. However, should this position change, it could affect credit strength - particularly considering the rated entity's absence of equity control over its onshore operating companies, that is, Tencent Computer, Shiji Kaixuan and other consolidated affiliated Chinese entities with whom it only has contractual relationships, due to government restrictions on foreign ownership in internet businesses.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- continued market leadership in online games, social media and social network services in China with steady market share gains
- rapid revenue growth of around 25% a year in the next two to three years
- robust and steady margins, driven mainly by changes in sales mix
- low capex/revenue of 6%-9% in the next two to three years
- dividend payout ratio of 10%-15% in the next two to three years

RATING SENSITIVITIES
Negative: Future developments that may individually or collectively lead to a negative rating action include:
- evidence of greater government, regulatory or legal intervention leading to an adverse change in the company's operations, profitability or market share
- material loss of market share in key products and services
- significant M&A that negatively affect the operations or the business profile
- sustained decline in operating cash flow
- a shift to more aggressive financial policies, for example a sustained loss of its net cash position or sustained fund flow from operations (FFO)-adjusted leverage above 1.5x (2014: 1.5x). However, in itself, FFO-adjusted leverage rising above this target will not likely lead to a downgrade should the company retain its strong net cash position and high FCF margins (2014: 33%).

Positive: For the short to medium term, Tencent's rating is at its ceiling and takes into account Fitch's expectation of profit growth. The agency may consider an upgrade if the company develops businesses that materially diversify cash generation away from operations that are subject to Chinese government and regulatory risk.

FULL LIST OF RATING ACTIONS
Long-Term Foreign-Currency IDR published at 'A+' with Stable Outlook
Foreign-currency senior unsecured class rating published at 'A+'
USD10bn global MTN programme assigned 'A+' rating
USD600m 4.625% senior unsecured notes due December 2016 assigned 'A+' rating
USD600m 3.375% senior unsecured notes due March 2018 assigned 'A+' rating
USD300m 1.860% senior unsecured notes due September 2015 assigned 'A+' rating
USD500m 2.000% senior unsecured notes due May 2017 assigned 'A+' rating
USD2bn 3.375% senior unsecured notes due May 2019 assigned 'A+' rating
HKD2bn 3.200% senior unsecured notes due January 2020 assigned 'A+' rating
HKD1.2bn 2.900% senior unsecured notes due April 2020 assigned 'A+' rating
USD1.1bn 2.875% senior unsecured notes due February 2020 assigned 'A+' rating
USD900m 3.800% senior unsecured notes due February 2025 assigned 'A+' rating