Asia's Tech Giants Are Making Analysts Play Catch-Up -- 3rd Update

By Saumya Vaishampayan, Steven Russolillo and Alyssa Abkowitz Features Dow Jones Newswires

Asia's biggest technology companies are growing so quickly that stock analysts can't keep up.

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Tencent Holdings Ltd., the Chinese gaming and social-media giant, on Wednesday reported another blowout quarter, highlighted by a 61% surge in quarterly revenue from a year ago. It was the company's fastest pace of revenue growth since 2010.

Tencent has now exceeded analysts' revenue estimates for nine straight quarters, according to FactSet, and its profits also have topped recent forecasts. No matter how optimistic analysts become, the company's results keep exceeding their targets. The same goes for rival tech giant Alibaba Group Holding Ltd., which has beat analysts' revenue expectations for nearly as many quarters.

"My peers and I, we've all been consistently wrong on forecasting these names," said John Choi, head of Hong Kong and China internet research at Daiwa Capital Markets. As the companies keep beating estimates, "we're all going back and revising our assumptions," he added.

One reason analysts have been off the mark is that the companies don't disclose much financial guidance. Tencent, for instance, doesn't offer earnings and revenue outlooks. Another factor that has caught some off guard is the momentum in China's consumer economy, which is driving the growth.

Tencent's shares have more than doubled this year, pushing the company's market capitalization to $466 billion, slightly larger than Warren Buffett's Berkshire Hathaway Inc., even though the latter's sales are much higher.

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The surge in large part reflects rising growth expectations for Tencent, which at the end of September was the No. 1 video-streaming service in paid subscriptions, according to data firm App Annie. Tencent now has more than 43 million paying subscribers, up from 20 million in November 2016.

Tencent isn't the only company confounding analysts. Across Asia, profit expectations for the continent's largest companies are climbing, helping to explain why many Asian stock markets are among the best performers globally this year.

Analysts are expecting 2017 per-share earnings for companies in a widely followed benchmark called the MSCI AC Asia ex-Japan Index to rise 22% from a year ago, the most bullish forecast they have collectively had in seven years, according to Bank of America Merrill Lynch. At the beginning of this year, analysts were forecasting 12.8% profit growth.

The index, which many money managers track, is made up of 633 of the region's large and midcap companies across nearly a dozen sectors. Its biggest components include Tencent and Alibaba, as well as Samsung Electronics Co. and insurer AIA Group Ltd. Led by stocks of those companies, the index has risen over 30% so far this year, more than double the 15% gain in the S&P 500 index over the same period.

The increasing optimism of analysts is noteworthy because traditionally, whether in Asia, Europe or the U.S., stock analysts' earnings expectations tend to start off more optimistic and get cut as the year progresses and companies report their quarterly results.

That has been the case in the U.S. this year, where analysts are now estimating 2017 earnings per share growth of 9.5% for companies in the S&P 500 index following three quarters of results. At the year's outset, they had predicted 11.2% in profit growth, according to FactSet.

Strong results so far this year from Samsung, Alibaba and semiconductor giant Taiwan Semiconductor Manufacturing Co. have helped drive the rise in Asian earnings estimates. Booming demand for smartphones continues to fuel exports in the region, including South Korea, where the country's semiconductor export growth hit a high recently, according to Goldman Sachs.

Because of rising profits, many investors believe that stocks can continue to rally even after markets have already hit records or multiyear highs this year.

"There is a lot of belief that things will continue to be wonderful for a long period of time," said Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Asset Management.

The worry for some investors is that this high bar for Asian companies could set them up for stock declines if their results miss analysts' expectations, even if profits or revenues are decent overall. The other concern is that many stocks could be vulnerable if the tech engine driving the gains fades.

In late October, the U.S.-listed shares of Baidu Inc. dropped 9.3% in the two days after the Chinese search-engine giant reported a surge in profits but said revenue rose 29% to 23.49 billion yuan ($3.53 billion), slightly missing analysts' expectations. Shares are still up 43% so far this year.

"When you are going through high growth periods, the share price...can be quite sensitive to a minor adjustment of the forecast or earnings," said Mr. Kwong.

Tencent's stock surge alone has been a key contributor to the Hong Kong's Hang Seng benchmark index, which is hovering near a 10-year high. South Korea's Kospi index, meanwhile, has gained more than 20% this year, driven in large part by Samsung.

Tencent shares slipped 1.3% in Hong Kong trading on Wednesday before the company reported a 69% jump in third-quarter profit to 18 billion yuan ($2.7 billion) and revenue of 65.2 billion yuan ($9.8 billion).

Tencent's performance was driven by growth in mobile gaming and advertising sales, particularly in its video-streaming platform. Revenue from video advertising grew 70% from the year-earlier period.

The bulk of Tencent's revenues continued to come from games. Smartphone gaming revenue rose 84% from a year earlier, anchored by smash hit battle game "Honor of Kings."

The company's messaging, mobile-payment and social-media platform, WeChat, which is the most popular app in China, reached 980 million users at the end up September, up 16% from a year earlier.

Kirk Boodry, an analyst at New Street Research in Singapore, said he increased his 2017 profit growth estimate after Tencent reported a similar surge in its second-quarter profit in August. He said he previously underestimated how much revenue the company would make.

On Wednesday, Tencent's results met Mr. Boodry's earnings estimate but beat his sales forecast. "The company is hitting on all cylinders," he said.

Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com, Steven Russolillo at steven.russolillo@wsj.com and Alyssa Abkowitz at alyssa.abkowitz@wsj.com

(END) Dow Jones Newswires

November 15, 2017 12:40 ET (17:40 GMT)