腾讯控股(00700) 　　Beat on P4P ads, subscription and payment; video cost weighs on margin 　　Tencent delivered a beat on 3Q16 revenue and mild miss on the bottom line.Total revenue was 4.7% higher than DBe, mainly driven by a surprise on P4Padvertising (8.4% ahead of DBe), non-game SNS (5.6% ahead of DBe) andOther revenue (RMB1.4bn above DBe driven by payment). Mobile/PC gamesmissed by 1%/2%. Management seemed confident around 4Q given the recentfavorable performance in the PvP and RPG genres. Non-GAAP OP margin was3ppts lower than us mainly due to investment on video and higher S&Mexpense on mobile app promotions. Given the intensive competition, videocost will likely see sharp increase in 2017, leading to a declined GPM onadvertising. The ramp of payment and its continuing improved margin shouldpartially offset the ad margin dip. 　　Strong P4P ad growth likely to continue in 4Q; cutting ad margins 　　Tencent continued to see strong performance advertising growth driven byLBS advertising tool opened to local small merchants. Total number ofadvertisers on WeChat Moment saw over 100% QoQ growth. We are alsopositive at WeChat official account ad matching system launched in mid-Oct,which will improve ad targeting significantly. Instead of adding ad load,Tencent now targets to deliver better ad tools to attract more advertisers.Brand advertising is 5.7% shy of DBe due to macro headwind. We expect tosee more ad budget shifting from brand ad to P4P. Given continuing heavyinvestment on video, we cut 2017 ad GPM by 6.7ppts to 40%. 　　Mobile game still solid; payment driving GPM positively 　　We feel management is comfortable at 4Q mobile game performance as thePvP and RPG games tend to attract higher time spend. The 40m+ DAU ofHonor of King is indicative of a usage record for mid-core games in China. Thecompany also saw materially revenue contribution from recently launched 3RPG games. We largely attribute the robust beat on other revenue to paymentbusiness, which is significant portion of other revenue. We expect continuedmargin expansion of other revenue to 30% in 2017 despite investment aroundcloud and others. 　　Tweaking down TP by 1.6% to HK$242; Maintain Buy 　　We lift FY16/17/18 revenue forecasts by 2.8%/3.8%/5.7% to reflect betteroutlook in advertising, subscription, and payment business. We cut non-GAAPnet margin by 80bps/30bps for FY6/17 to factor in higher investment aroundvideo, game, payment and cloud business, and lift 100bps for FY18 onpayment margin improvement. Our TP is based on SoTP: 1) 18x FY17E PE onmerged PC and mobile gaming and VAS, 2) 1.2x PEG FY17-19E for advertising,3) 40x FY17E EV/EBITDA for the payment, 4) net cash. Downside risks: declinein WeChat user activity; lower games monetization; increased competition.