Recent local mobile game sales update: Sales in the first quarter increased 11% year-on-year (Sensor Tower/Qimai).

“Battle of the Golden Shovel”/“Wang Zhe Rongyao” was driven by the launch of the new version/new season, contributing 60% + in turnover. The new tour “Yuanmeng Star” contributed an increase of 500 million yuan, and its monthly turnover dropped to 100 million yuan in March. The performance was weaker than our previous expectations. The flagship game “Wang Zhe Rongyao”/“Peace Elite” had a year-on-year turnover of +6%/-17%, and will gradually return to stability after commercial operation strategy adjustments.

Overseas mobile game release update: Supercell's performance is excellent. Sales increased 25% year over year, mainly driven by Supercell's flagship game. Among them, “Wilderness Brawl” benefited from business model restructuring (optimization of Battle Pass, etc.) and the addition of new gameplay methods to improve the user experience. The first-quarter turnover increased fourfold year-on-year, and the monthly turnover reached a record high of 580 million yuan in March. “Goddess of Victory: NIKKE”'s first-quarter turnover declined slightly from last year's high base, but began to recover in March, +40% compared to February.

Game revenue for the first quarter is estimated to have declined 2% year over year, mainly due to 1) based on the above revenue data, local mobile game revenue may still decline year on year; Supercell sales began recovering in the 3-4 quarter of last year and is gradually reflected in revenue, and overseas games are expected to increase 4% year on year; 2) Mobile games had a high base last year. Nexon led to a 35-44% year-on-year drop in game revenue in China. Judging from the popularity of March, “LoL” remained flat year on year. “Dreadless Contract” increased 60 percent year over year. %+.

Tencent's advertising business has the best performance in the industry: Compared to the industry, Tencent's video ad inventory is still increasing. As video account users spend more time using the video account, and the increase in content recommendation optimization and ad conversion rates with technical support, advertising revenue is expected to increase 20% year-on-year in the first quarter.

Outlook and valuation: We expect that in the second quarter, with the steady operation of old games and confirmed revenue in the first quarter, as well as the launch of new games (Dungeons and Warriors), Tencent's game revenue growth rate will improve, and the annual performance will be low and high. At the same time, we expect that high marketing expenses will not continue in the fourth quarter of last year. The company will continue to maintain the trend of gross profit growing faster than revenue and operating profit growing faster than gross profit, increasing operating profit by 8%/6% in 2024/25. According to the price-earnings ratio of the core profit business of 20 times and the market sales ratio of the cloud business, the SOTP target price was fine-tuned to HK$395 (previously HK$390), corresponding to the price-earnings ratio 18/16 times in 2024/25, to maintain purchases.