Tencent will report 1Q24 results on 14 May. We expect moderate 5% YoY topline growth of RMB157bn, contributed by -3% YoY soft VAS on high base game and streaming adjustments while 18% YoY solid ad and 12% YoY resilient fintech. GPM and adj. NPM meet streets' expectation at 49.7% and 27.3%, respectively. We deem committed executions of high quality growth strategy of all key segments on solidified competitive edges provide visible certainty on financials going forward. We expect accelerated YoY topline growth in 2Q-4Q24E mainly on rebounded online game, eliminations of streaming adjustments, solid ad and fintech momentum. Coupled with strong capital return initiatives, maintain BUY and our TP of HK$407.0.
Key Factors for Rating
Committed strategy provides visible financial certainty. We deem Co. will unswervingly and patiently execute their high quality growth strategy for social, game, online ad and fintech businesses amid macro uncertainties and intensified competitions. We expect streaming cut and high base game impact on VAS will gradually fade away from 2Q23 onwards. We believe stabilisation of top games grossing, outperformances of mid-tier domestic games, launches of new games and supercell contribution will support accelerated YoY growth of online game in 2Q-4Q24. Online ad will be consistently benefitted by video account monetisation and enhanced commercialisation capability and efficiency empowered by AI and various ad products. Thus, we keep our 2024-2026E game revenue estimations unchanged, trim our social network and fintech revenue estimations by 1-2% while nudge up our online ad revenue forecasts by 1%. We largely maintain our 2024-2026E GPM and bottom line estimations unchanged to reflect Co.'s committed growth strategy.
1Q24 preview: VAS impacted by high base game and streaming cut; resilient ad and fintech; inline GPM and adj. NPM. We model total revenue to grow 5% YoY to RMB157.5bn, -1% below consensus. We expect soft -3% YoY VAS mainly impacted by domestic game on 1Q23 high base and streaming cut on TME and Huya, partially offsetting by solid mini-game and music subs. Social network and VAS online game revenue is forecasted to drop -2% YoY and -4% YoY to RMB30.4bn and RMB46.6bn respectively. Resilient online ad will deliver 18% YoY to RMB24.7bn mainly benefitted by video account, mini program, mobile ad network and TME ad. Fintech and business services revenue will log 12% YoY to RMB54.7bn. GPM of 49.7%, in line with streets' expectation on consistent structural mix shift within 3 segments and improved cost efficiency. Adj. net profit is estimated to display 32% YoY to RMB43.0bn, with adj. NPM reaching 27.3%, also in line with consensus.
Key Risks for Rating
Downside risks: 1) regulations on games, fintech, online ad, streaming, personal data, taxation, etc.; 2) intensified competition for key segments; 3) weaker than expected macro; 4) destructive investments; 5) accelerated share divestment from main shareholder.
Valuation
Maintain BUY and our SOTP TP of HK$407.0 based on our updated estimations with corresponding 2024E multiples assigned to each segments (15.0x PER for online game, 16.0x PER for online ad, 15.0x PER for fintech & BS, 5x PSR for cloud) and updated subsidiaries and investments' valuation.