Tencent remains on track of margins expansion, underpinned by increased revenue contribution from high-margin businesses and operating leverage. The company is also committed to enhancing shareholder return, with daily share repurchase amount reaching HK$1bn (c.13% of average daily turnover) since 4Q23 earning release in March. For 1Q24E, we forecast total revenue to increase by 6% YoY to RMB158.6bn, while non-IFRS net income to grow by 31% YoY to RMB43.1bn, primarily driven by the solid GPM expansion (+c.3ppt YoY). We slightly lower our FY24-26 total revenue forecast by 1-2%, mainly to factor in the relatively soft gaming business. We fine-tune our SOTP-derived target price to HK$445.0 (previous: HK$450.5). Maintain BUY.

Games business to navigate short-term headwinds. Games business remains under short-term pressure and we forecast its revenue to decline by 2% YoY in 1Q24E, mainly due to: 1) prudent monetization of key titles like Honor of Kings and Peacekeeper Elite compared to the same period last year; 2) soft performance of certain PC titles like DnF on tough comps. Nonetheless, we expect games revenue to recover to positive YoY growth in 2Q24E, driven by the revamp of certain games' monetization and launch of new titles like DnF Mobile in 2Q24. For SNS business, we forecast its revenue to decrease by 2% YoY in 1Q24E, primarily due to adjustment of Huya and TME's live streaming businesses, but partially offset by solid growth of mini-games revenue.

Driving quality growth of ads/FBS businesses. We forecast advertising revenue to grow by 16% YoY in 1Q24E, driven by strong demand for Video Account (VA) ads and improved ad tech. We expect ad GPM to expand by c.7ppts YoY due to the enhanced monetization of high-margin Weixin ad properties like VA and Moment ads. For FBS business, we also expect continued high-quality growth, with revenue and GPM up by 14% YoY and 6ppt YoY respectively in 1Q24E, mainly supported by incremental revenue from high-margin VA e-commerce, wealth management and consumer loan businesses.

Maintain BUY. We are positive on Tencent's earnings growth in 1Q24/2024E (+31/18% YoY). In addition, the increase in shareholder return (FY24E share repurchases + cash dividends equivalent to ~5% of current market cap) should further support Tencent's valuation. We see Tencent's current valuation of 15x FY24E PE (12x FY24E PE excl. strategic investment value) remains attractive. Key catalysts: 1) launch of DnF Mobile in 2Q24 supporting games business recovery; 2) better-than-expected expansion of ad/FBS GPM; 3) increasing shareholder return.