Video channel operation side: The proportion of social recommendations is still high, depending on the increase in the richness of relevant content such as Pan-Entertainment. The DAU for video accounts is close to 500 million, and there is still a gap between the length of time; the age level of user portraits is high; the content of the video channel is widely distributed about life and general knowledge. This difference at the operational level is related to the rapid launch of video accounts through social recommendations (friend likes, small red dots, etc.) in the early stages. Under ideal conditions, the recommended share of machines in video channel distribution is 77%. We believe that the increase in the proportion of machine recommendations depends on the increase in the richness of content such as pan-entertainment. The creation of an ecosystem requires the introduction of creators, and the growth in the number of creators is non-linear and depends on the improvement of the platform's commercialization capabilities. The cold launch period relies on platform subsidies to guide quality creators. In March '23, the video channel launched the Polaris Project to recruit writers for stories, games, comedy, and music. The Golden Star Award supports pan-knowledge and pan-lifestyle content.

Kuaishou Douyin commercialization review: Looking at the commercialization progress, we believe that the video account is currently in a 20-year phase similar to Douspeed. The infrastructure has basically been perfected, it has entered the stage of refined operation, and the platform has begun special operation and support. Doukuai advertising business: Driven by initial traffic growth, advertising infrastructure construction promotes increased monetization efficiency. With the development of live e-commerce, internal circulation advertising has become the main driver, and platforms need to promote integration at the bottom of the business. E-commerce business: The pandemic has boosted the explosion in the past 20 years. The essence of e-commerce business development is user demand exploration. The increase in the penetration rate of users who placed orders in the early stages is driven by increasing user frequency (shelves, etc.) in the medium term. Leading anchors drive the cultivation of users' consumer mentality, and Kuaishou and Douyin set a benchmark for talents in 19/20. The methodology was proposed in '21, and the refined operation stage with targeted support was entered. Public domain, brand, and supply chain construction is the key to refined operation.

Video advertising business: advertising products are basically improved, the number of commercial tags needs to be increased, and content structure optimization raises the revenue limit. Traffic growth and Adload growth are the main drivers of current advertising revenue. Currently, the share of consumer goods in external circulation advertisements is relatively low, which is related to the characteristics of video accounts: unique private traffic is conducive to advertising with high decision-making requirements; Douyin and the like are suitable for beauty apparel and FMCG customers, mainly due to the construction of internal circulation systems, and e-commerce procedures are relatively short and fast. Video advertising development bottlenecks ① Advertising conversion rate: In terms of advertising infrastructure, the number of commercial labels needs to be increased and takes time to cultivate; ② Public domain and internal circulation system construction: Video account for private domain distribution is similar to Kuaishou in the medium term, so Adload is expected to be similar to Kuaishou in the medium term; when the internal circulation system is not completed, Adload is below 6%. At the end of '23, the video account Adload reached 3%, and there is plenty of room for improvement (currently 9% for Kuaishou and 15% for Douyin).

Video e-commerce: 24 years is a critical period for commercialization. The platform focuses on infrastructure construction and resource support, and needs to form methodologies and benchmarks. The main tasks of video accounts in 2024 are merchant introduction and GMV. In the first half of the year, video accounts, WeChat Pay, and Tencent advertising continued to improve the underlying infrastructure, and commercialization began in the second half of 2024. Video e-commerce market: Brand GMV accounts for 15%. The consumer population is too old, and clothing and food products account for more than half of orders. Infrastructure: ① The C-side infrastructure was gradually improved over 22 years, and expenses in the second half of '23 focused on consumer security; ② from the B-side, there is no clear methodology. The advertising infrastructure problem is currently plaguing businesses. The main direction of video e-commerce in '24: ① attracting brand merchants to enter and set brand benchmarks; ② launching a delivery account system to promote talents to bring goods; ③ supporting industrial belt service providers to increase the coverage of products and new anchors; ④ guiding merchants from private to public domain.

The Tencent Video account was quickly launched into users through social distribution in the early stages, and is currently in the early stages of commercialization. ① The content side affects the progress and upper limit of commercialization. Video accounts adjust the content structure through the introduction of creators to focus on changes in the share of video accounts; ② The accuracy of advertising affects the commercial experience, and it takes time to settle consumer labels; in terms of progress, video accounts use Kuaishou Douyin's history as a guide to steadily build a commercial ecosystem. Pay attention to the improvement in commercial transformation efficiency brought about by the infrastructure construction of WeChat and advertising teams.

Video accounts have great potential for development, and advertising and live e-commerce are high-margin businesses. Focus on the impact of commercialization progress on Tencent Holdings' performance. We estimate that in 24/25, video account advertising revenue will be 253/37.3 billion yuan, +74%/+48% year-on-year. Video e-commerce is estimated to be GMV3026/513 billion in 24/25, including internal circulation advertising+commission revenue of 700/16.5 billion dollars.

We expect that under high-quality development, Tencent's profit growth rate will be faster than revenue growth. We expect 24-26 revenue of 6631/7218/775 billion, a CAGR of 8%; adjusted profit of 1847/2105/23.6 billion (maintaining the original forecast), with a CAGR of 12%. As of 3/28/24, it corresponds to 14.4 times PEx in '24. The target price was HK$413-435 (original valuation of HK$525-588). Maintain a “buy” rating.