Thanks to the strong advertising business and the recovery of gaming energy, the “stock king”$TENCENT (00700.HK)$First-quarter earnings surpassed expectations.
Benefiting from favorable performance, Tencent surged more than 5% to reach the HK$400 mark as of press release.
Overall, Tencent's revenue for the first quarter increased 6% year on year to 159.501 billion yuan, and adjusted net profit increased 54% year on year to 50.265 billion yuan. Specifically, among Tencent's three core business segments, online advertising revenue was 26.506 billion yuan, up 26.44% year on year, fintech and corporate services revenue was 52.302 billion yuan, up 7.39% year on year, and revenue from value-added services was 78.629 billion yuan, a slight decrease of 0.89% year on year.
In terms of profitability, Tencent's gross profit for the first quarter was 83.87 billion yuan, up 23% year on year. The gross profit growth rate outperformed revenue for six consecutive quarters, and gross margin increased to 53% from 45% in the same period last year. The gross profit of Tencent's three major businesses increased sharply, and the gross profit of the fintech, corporate services, and online advertising business increased by more than 40% year-on-year for two consecutive quarters.
What do the major banks think?
Faced with the impressive quarterly report, major banks raised Tencent's target price one after another. Both Lyon and CMB International raised Tencent's target price to HK$480, Jefferies raised the target price from HK$453 to HK$475, and HSBC sharply raised the target price from HK$385 to HK$450.
Jefferies said that Tencent's revenue for the first quarter was in line with expectations, and reiterated that the company was the industry's first choice and raised the target price.
Jefferies said that Tencent's revenue for the first quarter was in line with expectations, and net profit under non-international accounting standards exceeded expectations. I believe Tencent has shown strong execution in its high-quality growth strategy, maintaining the purchase rating and raising the target price to HK$475.
CICC said that Tencent's advertising revenue potential has been further tapped, game traffic has returned to growth, and the improvement in gross margin continues to exceed expectations.
CICC believes that Tencent advertising may show more commercial potential based on user behavior and traffic trends (such as video accounts and applets). Although the growth rate of video channel traffic will inevitably slow down due to technical factors, advertising growth may not only rely on video accounts as a driver. We expect Q2 advertising revenue to increase 14% year over year to 28.5 billion yuan.
Guojin Securities released a research report saying that Tencent's gross margin has been greatly optimized and high-quality profits have been released to maintain a “buy” rating.
Guojin Securities believes that Tencent's gross margin was drastically optimized in the first quarter, and profits were released with high quality. Among them, total game traffic resumed growth in Q1, and new game launches+delayed release of old games will drive a recovery in Q2. However, advertising products such as video accounts are growing rapidly, and advertising effectiveness has benefited from the upgrading of AI technology platforms. As a result, the Guojin Securities team expects the company's NON-IFRS net profit of 2024/2025/2026 to be 2043/2289/256.9 billion yuan, respectively, maintaining a “buy” rating.
Video accounts continue to take responsibility for growth
The video account is the business highlight of Tencent's Quarterly Report. According to financial data, the total number of video channel users increased by more than 80% year-on-year in the first quarter. By expanding product categories and encouraging more content creators to participate in live streaming delivery, the live video channel delivery ecosystem has been strengthened.
According to the analysis, after more than 2 years of key investment, the overall platform ecosystem and content matrix of video accounts have been continuously matured and improved. Compared with competitors, Tencent's overall commercialization rate is currently low, which means that in 2024, Tencent has more room to monetize in order to increase its revenue on video accounts.
Revenue from the online advertising business greatly exceeded expectations. Tencent said in its earnings report that this has mainly benefited from new advertising revenue brought about by the rapid development of video accounts, applets, public accounts, WeChat Search, etc., as well as the improvement in revenue quality driven by AI technology. Tencent's online advertising business revenue has maintained high double-digit growth for 6 consecutive quarters, surpassing the industry average, and its revenue contribution has also increased from 13% in the same period in 2022 to nearly 17%.
Tencent believes that over time, the monetization potential of short video streams will eventually surpass traditional social information flows such as the circle of friends, and the company is also developing in this direction.
In addition, applets and mini-games performed well in the first quarter. The number of applet users increased by more than 20%, average daily usage of non-game applets achieved a double-digit percentage increase year over year, and mini game turnover increased 30% year over year.
The game's energy is back
The Tencent game sector, which the market had been worried about until now, is also gaining strength. Tencent's game business fully achieved year-on-year growth in both local and international markets in the first quarter. Tencent said total game sales increased, laying the foundation for game revenue to resume growth in the next few quarters.
In the gaming sector, Tencent has achieved an increase in total turnover. Revenue from the international game market increased 3% year on year, while local game revenue fell 2% year on year in the first quarter but increased 28% month on month, showing a strong recovery momentum.
During the earnings call, Tencent said that the growth in the international game market was due to the recovery in popularity of Supercell's games. In particular, the number of “Wild Brawl” accounts was more than double that of the same period last year, and the number of “PUBG MOBILE” users and sales increased; the growth of the local game market was mainly affected by the peak season during the Spring Festival.
Looking ahead, Tencent will continue to use AI technology to improve the efficiency and user experience of advertising and gaming businesses. Tencent management remains optimistic about the company's long-term growth prospects and anticipates that as the business portfolio is optimized, that is, the profit margins of various business divisions will continue to rise, and this positive trend will continue for several years.
Cow friends,
Are you optimistic about Tencent's next trend?
What is your target price?
Welcome to leave your thoughts in the comments area~
editor/tolk