1Q24 total revenue grew 6% YoY, in line with market consensus, while 52.6% GPM led to 31.5% adj. NPM, both beating consensus thanks to enhanced online ad monetisation from AI empowerment and rising engagement. Progressive cloud revenue optimisation from non-IaaS business and higher growth from business services all contribute to sustained margin expansion. Along with their committed capital return initiatives, maintain BUY and raise our SOTP TP to HK$445.0.

Key Factors for Rating

Sustainable rewards from high quality growth strategy. We see Co. is harvesting sustainable rewards from their dedicated high quality growth strategy. Enhanced, diversified, integrated and progressive monetisations on comprehensive tools, engaged traffic and increased time spent generate various high quality revenue stream. We expect VAS will experience accelerated YoY growth in the coming quarters in FY2024. For game, domestic games were benefitted by resumed 2 top titles, solid mid-tier titles and new games especially DNFM contributions while overseas will be mainly facilitated by supercell contributions with longer deferral policies. For social, solid music and long form video will sustain while streaming impacts will gradually fade away starting from 3Q24. For ad, increased engagement and AI empowerment will continue to drive progressive monetisations on various ad products and formats. Considering all the above factors, we maintain our 2024-26E total revenue estimations by uplifting our game, social and online ad forecasts while trimming our fintech estimations. We lift our GPM forecasts for 2024-26E by over 200bps on consistent high quality revenue streams contributions, which led to our uplifted adj. EPS estimations.

1Q24: Healthy user engagement; resumed game gross; shiny ad; soft fintech; solid GPM expansion. Total revenue grew moderately at 6% YoY to RMB159.5bn, in line with consensus with VAS and online ad leading streets' expectation while fintech underperformed. VAS revenue dropped by -1% YoY, among which social network and game revenue were -2% YoY and flattish YoY respectively. Though domestic game revenue logged -2% YoY, their gross receipts returned to 3% YoY with i) top titles HOK and Peacekeeper Elite gross resuming YoY growth in March 2024 benefitted from team restructures; and ii) a few mid-tier domestic games generating record high gross. Overseas game revenue increased by 3% YoY or flattish YoY on c.c and their gross receipts increased significantly by 34% YoY mainly on Supercell contributions and PUBG Mobile. For social, solid music and long form video subs, mini-game and video account live streaming partially offset streaming adjustments. Valuation

Ad rev delivered 26% YoY due to video account (ad rev up 100%+ YoY), Weixin search, mini programme (ad rev up 40%+ YoY) and official accounts benefitted from user engagement and AI enhancement. Fintech and business services revenue was relatively soft at 7% YoY. Fintech grew at single digit YoY due to moderate commercial payment and decreased withdrawal fee while strong wealth management services on user spending behaviour shifted. Business services recorded teens YoY driven by cloud and incremental video account eCommerce fees. GPM maintained solid expansion with 7.1ppts YoY/ 2.6ppts QoQ to 52.6%, consistently benefitted from structural mix shift and improved cost efficiency. Non-IFRS net profit continued to achieve accelerated 54% YoY to RMB50.3bn with Non-IFRS NPM of 31.5%, beating consensus.

Key Risks for Rating

Downside risks: 1) regulations on games, fintech, online ad, streaming, personal data, taxation, etc.; 2) intense competition for key segments; 3) weaker-than-expected macro; 4) destructive investments; 5) accelerated share divestment from main shareholders.

Valuation

Maintain BUY and raise our SOTP TP to HK$445.0 based on our updated estimations with corresponding unchanged 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.