To The Moon

Since mid-September, Tencent Holdings has experienced a strong rebound, with its stock price nearing HKD 500 at one point. Although it has slightly retraced recently, it remains up 45% for the year, stabilizing above HKD 400.

On November 13, Hong Kong time, after the market close, Tencent is set to release its 2024 Q3 earnings report. The market generally anticipates Tencent's Q3 revenue to reach HKD 167.746 billion, representing an 8.49% year-over-year growth, with an expected EPS of HKD 4.76, up by 26.78%.

Currently, the average target price among analysts is HKD 477, with a high target of HKD 559. Notably, there appears to be some optimism toward Tencent, as Southbound funds have net purchased Tencent shares for 10 consecutive days up to November 7, totaling around HKD 3.977 billion.

Additionally, Tencent has been aggressively repurchasing its shares this year. So far, it has repurchased HKD 90.34 billion worth of shares (2.55 billion shares in total), which have been cancelled. The company aims to reach its goal of repurchasing HKD 100 billion by year-end, bringing shareholders an approximate 2% additional return.

According to Bloomberg consensus estimates, value-added services are expected to generate HKD 82.71 billion in revenue, a 9.19% year-over-year increase. This includes gaming revenue of HKD 51.439 billion, with domestic gaming revenue of HKD 36.983 billion and international gaming revenue of HKD 14.989 billion; social network revenue is expected to be HKD 30.907 billion.

On the other hand, overseas gaming business Q3 revenue grew 27% year-over-year to HKD 8 billion, a slowdown from the Q1 and Q2 growth rates of 33% and 47%, respectively. Q3 overseas gaming growth is estimated at 15%, with Supercell's "Brawl Stars" performing strongly, generating an estimated HKD 1.74 billion. Due to extended overseas revenue cycles, additional contributions may continue into 2025.

Bloomberg consensus also projects that the online advertising business will generate HKD 29.762 billion in revenue, a 15.71% year-over-year increase, with a gross margin improvement to 55.9%. This improvement is primarily driven by healthy growth in Video Account traffic, which has a high gross margin, and strong growth in Mini Program ads, as well as enhanced ad effectiveness through AI technology platforms. However, the macroeconomic pressures on industries like real estate and automotive have slightly impacted the overall advertising market.

For investors looking to trade around Tencent's upcoming earnings, a short strangle strategy could be considered.

What is a Short Strangle Strategy?

In a long strangle options strategy, investors buy both an out-of-the-money call option and an out-of-the-money put option. The call option's strike price is above the current market price, and the put option's strike price is below the market price. This strategy has substantial profit potential because if the asset's price rises, the call option has theoretically unlimited upside, while if the asset's price falls, the put option can yield profit. The risk is limited to the premiums paid for both options.

In a short strangle strategy, investors simultaneously sell an out-of-the-money put option and an out-of-the-money call option. This is a neutral strategy with limited profit potential, aiming to profit when the underlying stock trades in a narrow range between breakeven points. The maximum profit equals the total premiums received from selling the two options, minus transaction costs.

Short Strangle Strategy Example with Tencent

Tencent’s current stock price is HKD 403. An investor can implement a short strangle strategy as follows:

• Sell an out-of-the-money call option with a strike price of HKD 440 for a premium of HKD 259.

  

  Sell an out-of-the-money put option with a strike price of HKD 390 for a premium of HKD 220.

  

Key details:

• Current stock price: HKD 403

• Sold a call option with a strike price of HKD 440, premium received: HKD 259

• Sold a put option with a strike price of HKD 390, premium received: HKD 220

• Total premium income = 259 + 220 = HKD 479

Profit and Loss Scenarios

1. Scenario 1: Stock price between HKD 390 and HKD 440

   • If the stock price is between HKD 390 and HKD 440 at expiration, neither option will be exercised.

   • Profit equals the total premium income.

   • Total Profit = HKD 479

2. Scenario 2: Stock price > HKD 440 (Call option exercised)

   • If the stock price exceeds HKD 440, the call option will be exercised.

   • You will need to sell the stock at HKD 440.

   • Profit/Loss = Premium income - Loss from the price exceeding HKD 440.

3. Scenario 3: Stock price < HKD 390 (Put option exercised)

   • If the stock price drops below HKD 390, the put option will be exercised.

   • You will need to buy the stock at HKD 390.

   • Profit/Loss = Premium income - Loss from the price falling below HKD 390.

Summary of Profit and Loss

• Maximum Profit: When the stock price is between HKD 390 and HKD 440, the maximum profit is HKD 479 (the total premium from both options).

• Breakeven Points:

  • Upper breakeven: HKD 440 + 4.79 = HKD 444.79, where losses start if the stock price exceeds this level.

  • Lower breakeven: HKD 390 - 4.79 = HKD 385.21, where losses start if the stock price falls below this level.

This strategy can yield a fixed profit if the stock price remains between HKD 390 and HKD 440, but significant price movements beyond the breakeven points may result in losses.