Tencent's financial report is in full swing. What kind of performance will this time around?

富途研究 ·  May 15, 2023 18:37

On the eve of the release of the financial report, Tencent ended a month of continuous downward trend in stock prices. On May 15, it once rose more than 4%, indicating that the market has some confidence in the performance of Tencent's earnings report.

Why is Tencent's financial report getting so much attention? On the one hand, the company itself is a high-quality Chinese internet giant, with a market capitalization of over 3 trillion Hong Kong dollars, and its influence on the general market is significant. On the other hand, Tencent's earnings data will reflect China's economic recovery in 23Q1 to a certain extent, and will also provide guidance for China Securities earnings reports that will be released in large numbers later.

So what kind of performance is expected in Tencent's 23Q1 earnings report? What aspects should I focus on as an investor?

01 Focus on Tencent's earnings outlook

For Tencent currently, the business competitiveness analysis is divided into three parts: “social product ecology+game+fintech”, which corresponds to the division of business revenue as follows:

(1) Social and advertising business; (2) gaming business; (3) Jinke enterprise service business.

However, the company's profit mainly comes from the value-added service business composed of “game+social networking”, and the gross profit contribution accounts for about 60% of the company.

Therefore, predicting the performance of Tencent's 23Q1 earnings report can first start with the gaming and social networking business, and determine the performance of the value-added service business by tracking the release and operation of Q1 core games, the flow and ranking of Q1 core games, and the growth of Q1 subscription members.

At the same time, since the performance of the advertising business and Jinke's enterprise services business is closely related to macroeconomics, the Q1 macroeconomics and the recovery in industry demand will determine the performance of Tencent's advertising and financial services business to a certain extent.

02 The driving force of games

The main driving force behind Tencent games is the continued growth in payment rates and per capita consumption. Judging from the game operation of “Wang Zhe Rongyao”, the operation team added more limited-time and advanced skins. For example, 13 top-level skins were updated, and only 6 Epic skins were updated compared to 202Q1. In other words, the Tencent gaming team is also actively controlling the long run in 2023Q1. It is expected that the Tencent game team is also actively controlling the long run of 2023Q1 and improving commercial monetization capabilities through key operations with key players, which is expected to effectively enhance ARPU and drive revenue growth.

Inferring from the situation of the 21 game companies that disclosed financial reports, the revenue of more than half of the companies declined year-on-year, the net profit of 6 companies fell by more than 60%, and companies such as Giant Network, Youzu Network, Perfect World, and Gigabit experienced a double decline in profit. In terms of net profit, the overall decline of the game companies mentioned above was even more obvious. Among them, the profits of 6 companies fell more than 60% year on year.

Simply put: game companies' first-quarter results were hugely mixed.

However, from Tencent's measures and the breadth of its gaming audience, we can infer that Tencent Gaming Q1's recovery is more likely. According to Sensor Tower data, Tencent Holdings continued to rank first among Chinese mobile game publishers in April, so overall Tencent Gaming was more elastic upward in the first quarter, but it also shows from the side that the “game industry” has entered the field of stock competition, and the future requirements for good works and operating capacity will be much greater.

03 Advertising and financial services business

Since Tencent's current overall volume is huge, the revenue and profit situation of the advertising business will be limited by the overall macro situation. According to AppGrowing data, in the streaming advertising market in the first quarter of 2023, the advertising volume of gaming, social and other industries all showed significant year-on-year increases; in Tencent advertisements, the proportion of social, financial, and lifestyle service advertisements placed increased year-on-year.

At the same time, the CPM of Tencent's video account is higher than Tencent's other advertising products, and the transformation of video channel advertising is beneficial to increasing the overall gross profit margin of the advertising business.

Furthermore, the company's Jinke Enterprise Service was also hampered by the overall macroeconomic recovery, and Q1 offline payments are expected to recover slightly year-on-year. Meanwhile, Tencent Cloud is expected to continue to push for cost reduction and increased efficiency and gross margin.

04 Valuation aspects

Currently, Tencent's market capitalization of HK$3.27 trillion, dividend ratio (TTM) is about 6%, and PE (TTM) is only 15 times. Tencent's current valuation conditions can be said to be “reasonable and cheap,” but the biggest difficulty limiting Tencent's valuation currently does not seem to be the basis of many investors' “hard work” analysis. Instead, it is a “majority shareholder sell-off”. Tencent's investors are “bright” in the general direction - “recovery of Tencent's earnings per share”, but in terms of trading strategy, it is inseparable from the “big shareholder sell-off point” and the “silent period for every financial report.”


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