Incident: Tencent 2023Q4 achieved revenue of 155.2 billion yuan, YoY +7.1%, QoQ +0.4%, Bloomberg expected 157.4 billion yuan; adjusted net profit of 42.7 billion yuan, YoY +43.7%, QoQ -5.0%, and Bloomberg expected 42 billion yuan.
Core product turnover has declined. Focus on this year's new product cycle. 2023Q4's value-added services business achieved revenue of 69.1 billion yuan, YoY -2%, of which game business revenue was 40.9 billion yuan, YoY -2.2%, and QoQ -11.1%. ① Domestic game revenue of 27 billion yuan, YoY -3.3%, QoQ -17.4%. Mainly, sales of core products “Wang Zhe Rongyao” and “Peace Elite” have declined, and the new games “Fearless Contract” and “Ark of Destiny” have brought a certain increase; ② Overseas game revenue of 13.9 billion yuan, YoY +1%.
③ In terms of mini-games, the total turnover of mini-games increased by more than 50% in 2023. Judging from product reserves, Tencent is expected to launch a number of major products in 2024, the DNF mobile game “Dungeons and Warriors: Origin” (Q2 launch), the MMORPG “World of Taris”, the first game “Star Breaking Dawn”, Ubisoft's collaboration on “Global Blockade: Dawn”, the anti-war mobile game “Reverse War: Future”, the 3A blockbuster “Operation Delta”, Pokémon IP “Pokémon Gathering”, Civilization IP “World Qiyuan”, and Extreme Flying IP “Extreme Flying IP” “Speed Car: Assemble”, Assassin's Creed IP “Assassin's Creed: Jade”, etc.
The support of video accounts and AI is significant, driving double-digit growth in the advertising business. 2023Q4's advertising business revenue was 29.8 billion yuan, YoY +20.8%, QoQ +15.8%. The total usage time of video users doubled, and advertising demand was strong. The company upgraded its AI-driven advertising technology platform, which significantly improved the effectiveness of accurate delivery. Judging from the advertiser structure, all industries except automobiles have increased their budget expenditure on corporate advertising platforms over the same period last year. Among them, the Internet, health, and consumer industries are growing rapidly.
Revenue structure optimization led to an increase in gross margin, and marketing expenses rose in the short term due to the promotion of “Yuanmeng Star”.
2023Q4's gross margin was 50.0%, YOY+7.3pcts, QoQ+0.5pcts, mainly revenue structure optimization. Among them, the gross margin of value-added services/ advertising/ financial services was 53.7%/56.8%/43.9%, respectively. 2023Q4 has a sales expense ratio of 7.1%, YOY+2.4pcts, and QoQ+2.0pcts. We think the main reason is that “Yuanmeng Star” Q4 launch promotion expenses are high. Management fee rate 17.5%, YOY-1.3pcts, QoQ+0.5pcts.
Investment advice: Switch to high-quality growth and be optimistic about the company's long-term value. We believe that the growth rate of the company's game business has slowed in the short term due to the decline in core product flow and the lower than expected performance of new games, combined with intense competition in the domestic and overseas game markets. However, the performance of “Yuanmeng Star” does not mean that the company's advantage on the DAU circuit has weakened. At the same time, many blockbuster products are expected to increase performance in 2024. Advertising benefits from improvements in video accounts and advertising technology, financial technology, recovery in offline trading scenarios, and business innovation after improving compliance capabilities. Meanwhile, the company plans to increase the share repurchase scale to HK$100 billion in 2024. We expect the company to achieve net profit of 1434.94/1707.96/188.575 billion yuan in 2024-2026, maintaining a “buy” rating.
Risk warning: Policies and regulations have been strengthened, game launches fall short of expectations, commercialization falls short of expectations