Consumer Internet business is faced with macro adverse factors.
We expect Tencent's consumer Internet business, such as games and advertisements, to face high base and macro adverse factors in 1H22. Considering the weak performance of advertising and social networking businesses, we lowered our annual revenue forecast for 21-22-23 by 1.4%, by 3.2%, by 4.1%, and by diluting the overall gross profit margin by increasing the contribution of revenue from financial technology and corporate services with lower gross profit margin. We lowered our forecast of non-IFRS net profit by 5.7% by 12.0% in 21-22-23 to 14461,165.1 billion yuan in 1310. We expect year-on-year growth in non-IFRS net profit to return to 10.4% in 22x23 (6.7% in 2021), mainly due to a multi-business recovery and operating leverage. The target price based on SOTP valuation is HK $603.8 (previous value: HK $608.0), corresponding to 33.1 times / 29.0 times 22 PE under non-IFRS. Keep buying.
Overseas expansion leads to the growth of game revenue
We expect game revenue to grow 12.0%, 11.1%, 10.4% in 2023, mainly driven by growth in the overseas sector (expected annual compound growth rate of income from 2021 to 2023: 21.0%).
We expect that the domestic game market will continue to face strict regulation, while overseas markets will have more growth opportunities. Tencent will continue to increase investment in the overseas game market, and we expect overseas game revenue to contribute about 28% of game revenue in 2022. In terms of social networking business, we expect the live broadcast and online literature business to face competition from other forms of entertainment in 2021-2023, resulting in a slowdown in growth. We expect revenue from social networking services to grow by 9.0% in 2023, 7.5% in 2023, and 7.5% in 2023.
Financial technology and corporate services business drive overall revenue growth
We expect that financial technology and corporate services business will boost Tencent's income growth in 2021-2023. We expect revenue from this sector to grow by 36.3%, 27.9%, 24.0%, or 30.7%, 34.2%, of total revenue in 2023. In terms of advertising business, in addition to macro adverse factors, weak advertising demand in the education, insurance and game industries will also have a negative impact on Tencent's 2H21-1H22 advertising revenue, but online advertising business is expected to resume growth from 2H22. We expect online advertising revenue to grow by 12.4% in 2023, 7.6% in 2023, and 13.3% in 2023.
Operational efficiency is expected to improve from 2023
As the revenue structure tilts towards the financial technology and enterprise services businesses with lower gross margins, and the gross margin of the online advertising business narrows, the company's overall gross margin may fall from 46.0% in 2020 to 44.8% in 2023 to 44.8% in 2023. In addition, due to the increase in operating expenses, we predict that the non-IFRS net interest rate will narrow from 25.5% in 2020 to 23.1% in 2021, 22.2% in 2023, but the profit margin is expected to stabilize and pick up from 2023.
Risk tips: 1) increased competition in the social networking sector; 2) slower revenue growth in the game business; and 3) tighter regulation in the financial technology industry.