The increase in the share of high-margin business revenue led to an increase in profitability, and non-IFRS net profit exceeded expectations. The increase in the share of high-margin business revenue led to an increase in profitability, and non-IFRS net profit exceeded expectations. The company's 23Q4 revenue increased 7.1% year over year to 155.2 billion yuan (1.4% lower than Bloomberg's forecast of 157.4 billion yuan), non-IFRS net profit increased 43.7% year over year to 42.68 billion yuan (higher than Bloomberg's forecast of 41.97 billion yuan), and the adjusted profit margin was 27.5%, up 7.0 pct year on year.

23Q4's overall gross margin increased by 7.3 pct/0.5 pct to 50.0% year over month. Among them, gross margins of value-added services/advertising/fintech and corporate services increased by 3.9 pct/12.5 pct/10.3 pct to 53.9% year over year, and profitability continued to increase. We believe the main reason was the increase in the share of high-margin businesses such as mini games and video ads. The sales expense ratio and general administrative expenses rate changed by +2.9 pct/-1.3 pct year-on-year to 7.1% and 17.5%, respectively. In addition, the company plans to pay a dividend of HK$3.4 billion per share (approximately HK$32 billion, up 42%), and announced that the 2024 repurchase scale will at least double, from HK$49 billion in 2023 to over HK$100 billion in 2024. Assuming that the dividend amount remains unchanged in 2024, that is, the dividend ratio of HK$132 billion in shareholder returns exceeds 4.8% of the market value on the financial disclosure date (3/20).

The game business is under pressure in the short term, and attention is being paid to the release of production capacity for key IP games in the future. 1) Domestic: In 23Q4, revenue from the local game market fell 3% year on year to 27 billion yuan. The revenue of “Wang Zhe Rongyao” and “Peace Elite” declined, and the new games “Fearless Pact” and “Ark of Destiny” contributed a certain amount of increase. In addition, high-margin mini games maintained rapid growth (revenue is included in social networking value-added services), and total mini game turnover increased by more than 50% in 2023. Among the follow-up product reserves, the flagship handover product “Dungeons and Warriors Mobile Game” has obtained a version number, the open world RPG game “King's Glory: World” has announced an actual machine demo, the 3A shooter “Operation Delta” has recently begun testing, and IP products such as “Dawn of the Stars” and “Pokémon Gathering” are also open for reservation. We expect that as the company launches many new games in the future, it is expected to bring new growth impetus to game revenue.

2) Overseas: In 23Q4, overseas game revenue increased 1% year-on-year to 13.9 billion yuan (down 1% after deducting exchange rates, etc.), accounting for 34% of game revenue. Games such as “PUBGMOBILE” and “Goddess of Victory: NIKKE” performed well. According to the company's financial report, the revenue of “PUBGMOBILE” in India, the US and other markets has risen rapidly recently. Overseas revenue increased 27% month-on-month in December 2023, making it the top revenue list and runner-up in the growth list. The overseas edition of “HonourofKings” of “Wang Zhe Rongyao” has recently expanded to 57 countries and regions, including the Middle East, North Africa, Turkey, and South Asia, ranking in the top ten or even the top three free rankings in many places.

The WeChat ecosystem continues to drive high-quality growth in advertising revenue. 23Q4 advertising revenue increased 21% year over year to 29.8 billion yuan, mainly driven by video channel advertising demand and continuous upgrading of advertising platforms. The Internet service, health, and consumer goods industries saw significant growth in advertising revenue. In 2023, the usage time of video account users doubled, and the number of daily active WeChat search users surpassed 100 million. The WeChat ecosystem further demonstrated its strong vitality and commercial value. 23Q4 The number of creators generating revenue from video accounts more than tripled year-on-year. The company continued to provide video channel creators with more monetization support for live streaming. Video accounts have become an important driving force for Tencent's advertising, corporate services, and payment businesses, bringing steady growth in new revenue for many consecutive quarters.

Financial and corporate services businesses are growing healthily. 23Q4 Fintech business and corporate services increased 15.1% year over year to $54.4 billion. Among them, revenue from fintech services maintained double-digit year-on-year growth, mainly due to increased commercial payment activity and growth in financial services and consumer loan services. Enterprise service revenue achieved a year-on-year increase of about 20%, mainly due to an increase in video delivery technology service fees and a steady increase in cloud service revenue. Since its launch in September last year, Tencent's hybrid features have continued to expand, including Wensheng Map, Wensheng Video, etc., and its capabilities rank first in the country. Currently, Tencent Hybrid has been tested in more than 400 internal businesses, and products such as Tencent Documents and Tencent Conference have all introduced large-scale models to provide services to users.

Profit forecasting and valuation analysis. In summary, we expect the company's 2024-2026 non-IFRS net profit to be 20.1%, 10.5%, and 9.0%, respectively, of 189.31 billion yuan, 209.25 billion yuan, and 228.03 billion yuan, respectively. Using the segmental valuation method, we determined that the company's reasonable market value range in 2024 was about 44439 to 5098.4 billion yuan, corresponding to a reasonable value range of 523.77 to 600.92 HKD/share, maintaining the company's superior market rating.

Risk warning. Anti-monopoly policies are becoming stricter; game market policy regulation is becoming stricter; content piracy risks; there is a risk that advertising revenue growth will slow down due to the macroeconomic downturn; cloud business development falls short of expectations; fintech policy regulation is becoming stricter; and investment returns are uncertain.