1Q game growth is weak, and future expectations have improved
Top game sales were weak in the first quarter, mainly due to the high Spring Festival base in '23. Tencent will launch “DnF Mobile Games” and “Need for Speed: Assemble” in 2Q and 3Q respectively, which is expected to improve mobile game revenue growth. We expect Tencent's total revenue for the first quarter to increase 6.0% year over year. Among them, VAS, advertising, and fintech businesses changed -2%, 18%, and 14% respectively, gross margin increased 5.1 points to 50.6% year over year, and adjusted net profit increased 37% year over year to 44.6 billion yuan. Looking ahead to 24-26, we adjusted Tencent's revenue forecast by -0.8/-0.9/ -0.9%, respectively, and adjusted net profit forecasts changed by 3.8/6.2/ 7.1% to 192.8 billion, 225.5 billion, and 253.9 billion yuan. Based on the SOTP valuation, we gave a target price of HK$415.11 (previous value: HK$438.44), maintaining a “buy” rating.
24 years of AI-enabled advertising, and gross margin continued to rise
We expect 1Q ad revenue to grow 18% year over year, and gross margin will improve significantly year over year. The growth drivers for video ads in '24 were mainly due to improvements in length, impression, and CTR, while AI brought efficiency improvements to advertising. Tencent's advertising system completed major upgrades in the first quarter, involving a number of important industries, such as phased management of the game life cycle, the addition of material tagging features, and a more streamlined delivery level.
In April, the Tencent advertising AIGC platform was updated again to support the ability to draw pictures, and the overall CTR for game and network service customers was improved by more than 15%.
1Q payment revenue grew steadily, and the live e-commerce business gradually rebounded offline consumption in the first quarter of last year, leading to a high base. We expect 1Q fintech revenue to increase 14% year over year. The video channel is mainly a franchisee model. It will steadily promote the live e-commerce business in 24, while also taking into account brands and medium- and long-tail merchants. GMV has broken 100 billion in 23. We expect the cloud business to maintain steady revenue and efficiency growth in the first quarter and 24 years. On the profit side, the increase in revenue from credit products and live e-commerce will lead to an increase in fintech gross margin in '24.
Risk warning: Top game traffic declined; macro recovery and advertising growth fell short of expectations, net profit margin expansion was slower than expected; and the rebound in fintech and cloud businesses fell short of expectations.