Core views

In terms of games, 1Q24 Tencent gradually got out of the pain of adjusting the pace of commercialization. New game launches grew well, total sales of overseas games grew strongly, and domestic games showed clear signs of recovery from month to month. In terms of advertising, AI's improvement in accurate advertising delivery is expected to continue, improving the sector's long-term potential and promoting a further increase in advertising business revenue and gross margin. The revenue structure of the social networking business, fintech and corporate services business has been optimized, gross margin has improved dramatically, and the development trend is good. Overall, Tencent's share of high-quality revenue has increased significantly, and AI applications will bring about cost efficiency improvements, and the medium- to long-term outlook is optimistic.

occurrences

Tencent released its 1Q24 earnings report. The game business showed a clear recovery trend on the revenue side. In 1Q24, Tencent achieved revenue of 159.5 billion yuan, yoy +6%. On the profit side, 1Q24 Tencent achieved overall gross profit of 83.9 billion yuan, yoy +23%, and GPM 52.6%. 1Q24 Tencent achieved non-IFRS net profit of $50.3 billion, yoy +54%, and net interest rate of 31.5%, exceeding agreed expectations.

Brief review

Mini games and music subscriptions drive revenue growth, and structural optimization increases gross profit levels.

The company's 1Q24 social networking business achieved revenue of 35.5 billion yuan, or -2% year-on-year, mainly driven by revenue growth from music subscriptions, video streaming services, and mini game service fees. In particular, mini-game turnover was +30% year-on-year. However, this was partly offset by a drop in revenue from music and game streaming services.

In addition, a decrease in revenue from low-margin live streaming services and an increase in service fees for high-margin small game platforms have led to an optimization of the revenue structure.

Total overseas game sales grew strongly. Domestic games showed clear signs of recovery month-on-month in the international market, benefiting from the recovery in popularity of Supercell games and the good growth of “PUBG MOBILE”. Overall game sales in the international market were +34%, but Supercell's revenue was delayed for a long time. In the 1Q24 international market, game revenue reached 13.6 billion yuan, +3% year-on-year; in the local market, “Fearless Contract” and “Battle of the Golden Shovel” were strong growth, offsetting most of “Wang Zhe Rongyao” and “Peace Elite” Decreased, 1Q24 game revenue in the local market was 34.5 billion yuan, -2% year over year and +28% month over month. “Wang Zhe Rongyao” and “Peace Elite” benefited from the pace of commercialization and improved game content design, and achieved year-on-year growth in 3M24. 1Q24 game business revenue was 48.1 billion yuan, yoy -0.5%, and QoQ +17.6%. The month-on-month increase showed signs of recovery.

AI-driven advertising has achieved remarkable results. Support for advertising in key industries continues to increase, and the gross profit of the online advertising business has both increased. In 1Q24, online advertising business revenue reached 265 billion yuan. +26% year over year, down 11% month over month. Gross profit increased 66% year over year to 145 billion yuan, down 14% month-on-month. The month-on-month decline in revenue and gross profit was mainly affected by the low season of advertising campaigns during the Spring Festival. Drivers of year-on-year growth include: 1) Increased user engagement in the WeChat ecosystem, driven by AI-driven advertising technology platforms, and WeChat video accounts, applets, public accounts, and search and search have achieved continuous growth. Specifically, through the expansion of product categories and the strengthening of the live video delivery ecosystem, the total usage time of video account users increased by more than 80% year-on-year; the total usage time of applet users increased by more than 20% year-on-year.

Among them, the average number of daily uses of non-game applets achieved a double-digit percentage increase year over year, and mini game traffic increased 30% year over year. 2) With the exception of the automotive industry, advertising expenses on advertising platforms have increased in all key advertiser industries. Among them, the gaming, internet services, and consumer goods industries have grown significantly; the strong growth in high-margin video accounts and search advertising revenue has greatly optimized the gross profit of this business sector.

Revenue from fintech and enterprise services is growing steadily, and improvements in cloud services and revenue structures have made gross profit grow significantly. Due to a slowdown in offline consumer spending and a decrease in withdrawal revenue, 1Q24 fintech services grew in single digits year over year. Driven by cloud services and technical service fees from video account merchants, enterprise service revenue increased > 10% year over year. In terms of cloud services, due to Moore's Law continuing to reduce computational costs, the agreed price of cloud services has declined. In this context, the company focuses on self-developed products, strengthens sales assessments, and enhances cost competitiveness through scale and supply chain optimization. In 1Q24, revenue from the fintech and corporate services business reached $52.3 billion, +7% year-on-year. Gross profit reached 23.9 billion yuan, +42% over the same period, gpm+12pct. It mainly benefited from the increase in high-margin business contributions such as financial services and technical service fees for video account merchants, the promotion of commercialization of corporate WeChat, and the increase in the cost efficiency of the cloud business.

Investment advice: gaming aspects, 1

Q24 Tencent's game business is showing signs of recovery. Overseas Supercell games are picking up in popularity and “PUBG MOBILE” is growing well, domestic “Fearless Contract” and “Ark of Destiny” are growing steadily, and “Battle for the Golden Shovel” is growing strongly. Furthermore, by optimizing operations and focusing on the “Evergreen Game” strategy, we have successfully improved the performance of games such as “Wild Brawl”. Strategically, management emphasized the importance of launching high-quality new games and optimizing the operational efficiency of Evergreen Games. In terms of advertising, 1Q24 AI's revenue improvement and gross profit optimization effects on the advertising business are obvious. AI's optimization of accurate advertising delivery effects is expected to continue, while improving the long-term potential of the sector. Furthermore, the current ad load of video accounts is not high, and there is some upside space. In the future, the company will use AI, new games, WeChat e-commerce, and SaaS products to increase click rates and user engagement. The revenue structure of the social networking business, fintech, and corporate services business has been optimized. The share of high gross profit revenue has increased markedly, gross margin has improved dramatically, and the development trend is good. Overall, Tencent's medium- to long-term business still has good growth prospects and profit returns. Maintain Tencent's “buy” rating.