The company's recent situation
Tencent announced that the mobile game “Dungeons and Warriors: Origins” will be officially launched on May 21, 2024.
reviews
The mobile game “Dungeons and Warriors: Origins” is officially scheduled for 2Q24. “Dungeons and Warriors” (“DNF” for short). According to Nexon's financial reports, the “DNF” national service game represented by Tencent still has strong monetization capabilities for many years since its launch. “Dungeons and Warriors: Origins”, which is scheduled to be launched on May 21, is the national service mobile game version. According to Tencent's official website, the data popularity of the “DNF” national service mobile game during the test period was good — more than 3 million people grabbed numbers within three days of the test; 230,000 people participated in the test on the first day of service. We believe that although “DNF” is an old game and may not have an advantage in terms of gameplay innovation, when the best mobile game in history releases the original mobile game of the same name, it is expected to take on the IP of the mobile game and the players accumulated over the years (including active players and lost players. Considering the 16-year operating history of “DNF” mobile games, the latter should cover a larger number of people), the “DNF” mobile game hopes to create a higher level of traffic and has little impact on mobile games. We are optimistic about the performance of the “DNF” national service mobile game.
The year-on-year growth rate of the game business in 2Q24 is expected to improve. We believe that Tencent's domestic game performance is still weak in 1Q24, but Tencent management emphasized during the 4Q23 results meeting that the game business is expected to pick up in 2Q24. We believe that this judgment includes the following three aspects: First, management is confident that overseas games are recovering. We have observed that Supercell's old game “Brawl in the Wild” released significant monetization space after implementing Starr Drop's new random reward system reform. According to data.ai, the average monthly iOS store revenue for “Wilderness” increased more than fivefold from October 2023 to March of this year. Second, domestic products such as “Battle of the Golden Shovel” and “League of Legends” mobile games have also performed well, which can effectively relieve the fatigue of recent new products and the adjustment pressure of leading ace products. Third, we believe that the contribution of “DNF” mobile games was secondary in 2Q, because management may not give forward-looking guidance based only on a game that only went live for one month in 2Q, had deferred revenue, and is currently not online. We believe that “DNF” mobile game sales may contribute significantly to 2H24 game revenue.
At this stage, Tencent's investment logic is still highly certain. Historically, there are two typical states of Tencent's growth: (1) the healthy and rapid development of the platform business (finance, friend zone advertising, video accounts, applets, etc.) + normal game development. In this state, investment in Tencent has strong certainty but weak elasticity; (2) the rapid and healthy growth of the platform business+rapid game growth, such as in 2017 and 2020. Investment in Tencent in this state is both deterministic and flexible. We believe that the first state is the norm for investing in Tencent, while the second status is a rare opportunity and can only be closely tracked. Currently, Tencent's investment logic is closer to the first state. The company's main growth logic comes from the release of profits from video advertising & e-commerce, mini games, FBS and other businesses, superimposed on the company's active shareholder return strategy. We expect to form a “EPS growth rate > adjusted operating profit growth rate > gross profit growth rate > revenue growth rate” model. Although the launch of the “DNF” mobile game will bring considerable growth to the game business, the overall game is still in a state of accumulation and partial strategic adjustments.
Profit forecasting and valuation
We maintain our 2024/2025 revenue and profit forecasts unchanged. Maintaining the “outperforming industry” rating and target price of HK$418, corresponding to 19.7x/16.3x 2024e/2025e non-IFRS P/E, with 30.5% upside compared to the current stock price. The current share price is trading at 15.1x/12.5x 2024e/2025e Non-IFRS P/E.
risks
Macroeconomic uncertainty; incremental business falls short of expectations; costs or expense rates are higher than anticipated.