Key points of investment

Revenue grew steadily, and profit exceeded expectations: 1Q24 achieved operating income of 159.5 billion yuan (yoy +6.3%), higher than Bloomberg's agreed estimate of 158.8 billion yuan; non-GAAP net profit of 50.3 billion yuan (yoy +55%), higher than Bloomberg's agreed estimate of 43 billion yuan.

Domestic games were affected by revenue delays, and international games showed a recovery trend: 1Q24 online game revenue was 48.1 billion yuan, down 0.4% year on year, higher than Bloomberg's agreed forecast of 47.3 billion yuan. Among them, domestic market revenue was 34.5 billion yuan (yoy -2%, qoq +28%), higher than Bloomberg's agreed forecast of 33.6 billion yuan, and international market revenue of 13.6 billion yuan (yoy +3%, qoq -2%), which is basically in line with Bloomberg's agreed estimate of 13.6 billion yuan.

Ad revenue was higher than market expectations, and demand for video accounts continued to grow: 1Q24 ad revenue of 26.5 billion yuan (yoy +26%), higher than Bloomberg's agreed estimate of $24.8 billion. Revenue growth was driven by growth in WeChat video accounts, applets, public accounts, and search, mainly due to increased user engagement and the continuous upgrading of A1-driven advertising technology platforms. With the exception of the automotive industry, advertising spending increased in all major industries, with significant increases in advertising spending in the gaming, internet services, and consumer goods industries.

The fintech business continued to grow, and financial management and cloud services grew strongly: 1Q24 fintech and corporate services revenue of $52.3 billion (yoy +7%, qoq -4%), lower than Bloomberg's agreed estimate of $55.1 billion. Revenue from fintech services grew at a single-digit percentage year over year, mainly due to a slowdown in offline consumer spending growth and a decrease in withdrawal revenue, while revenue from financial management services grew strongly. The revenue of the enterprise service business achieved a year-on-year growth rate of about ten points due to the increase in cloud service revenue and technical service fees for video account merchants.

Advertising business and value-added services led to an increase in overall gross margin: The overall gross margin in 1Q24 was 52.58% (YoY+7pct, qoq+3pct). The positive increase in gross margin was due to rapid growth in high-margin revenue sources. Sales expenses for the quarter were 7.5 billion yuan, up 7% year on year, management expenses were 24.8 billion yuan, up 1% year on year, down 9% month on month, and management expense ratio decreased 0.9 pct year on year.

Profit forecast and investment rating: The increase in the company's gross margin exceeded expectations. We adjusted the adjusted net profit for 2024-2026 from $1850/2104/2393 billion to $1932/2357/266.3 billion, corresponding to 2024-2026 PE of 18/15/13 times (HKD/RMB = 0.93, May 17, 2024). The company still has solid business barriers and a strong ecosystem. Overall business revenue such as video accounts, applets, and fintech continues to grow, so we maintain the company's “buy” rating.

Risk warning: Policy and regulatory risk; operating data lower than expected; monetization pace lower than expected.