MIRAE ASSET:Tencent’s League of Legends touched 700K PCU

We expect Tencent to beat 2Q11 consensus top line by 7% and operating profit by 9% on continued strength from online games. We forecast online game revenue to grow 6% q-q and 77% y-y and 53% of 2Q11 revenues. Weak seasonality in older games was offset by new games, in particular League of Legend (LOL), and Open Platform Initiative (OPI), resulting in strong growth from third party social games. Betting against Tencent’s game business remains an unsound idea until at least 1H12, in our view. In the mean time, success of OPI for non-game businesses will determine Tencent’s future valuation. Reiterate BUY rating with a TP of HK$265.

» We expect online game revenue to grow 6% q-q and 77% y-y in 1H11. Qzone revenue should outperform

» Tencent’s new game, LOL touched 700K PCU after open beta on 25 May. QQ WWJ, launched on 15 March was unspectacular (<50K PCU)

We expect LOL (英雄联盟) to break 1m PCU for the game

After a limited open beta with 2m test accounts, LOL is opening up for unlimited open beta on21 July. PCU has already touched 700K in early June with the limited beta testing, hence we believe unlimited open beta will quickly catapult the traffic of this game to more than 1m PCU. QB purchase of LOL items has already earned Tencent more than Rmb100m of deferred revenues, according to our channel check. We estimate most of this will be booked in 2Q.

» Solid 2H pipeline ahead: LOL ramp up and QQ XXZ

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