Matters:
1Q24 operating results: Revenue was in line with expectations, and profit greatly exceeded expectations. The company achieved revenue of 159.5 billion yuan, YOY +6%, QOQ +3%, in line with expectations; realized gross profit of 83.9 billion yuan, YOY +23%, QOQ +8%, corresponding to GPM 53%, YOY+7pct, QoQ+3pct; non-IFRS net profit of 50.3 billion yuan, YOY +54%, QOQ +18%, which greatly exceeded expectations. Exceeding expectations stems from three points: 1) From reducing costs to increasing efficiency, endogenous management efficiency and revenue quality have improved markedly; 2) the profit contribution of joint ventures and joint ventures has increased significantly, and the value of epitaxial investment has been released; 3) the WeChat ecosystem's impressive traffic performance has driven advertising revenue to exceed expectations.
Commentary:
Overseas games: SUPERCELL is recovering strongly, and turnover is not fully reflected in revenue. Revenue of 13.6 billion yuan and YOY +3% for the quarter is expected to be driven mainly by the strong recovery of Supercell's game “Wild Brawl” and the growth of “PUBGM” users and sales. It is worth mentioning that overseas game business turnover this quarter was YOY +34%, and Supercell's revenue recognition cycle is long, so the above revenue recovery is expected to be released as revenue in the next few quarters.
Domestic gaming: Traffic has resumed growth, and the worst is probably over. Revenue of 34.5 billion yuan was achieved, YOY -2%, but 1Q24 turnover YOY +2%, and positive growth has resumed. The detailed breakdown of products, although “Wang Zhe Rongyao” and “Peace Elite” all declined due to high base or commercial pace issues, most of them were offset by the strong performance of mid-size games such as “Battle of the Golden Shovel”, “Crossing the Line of Fire”, and “League of Legends Mobile Game”, as well as the “Fearless Contract” released in the summer of '23. Looking ahead, on the one hand, “Wang Zhe Rongyao” and “Peace Elite” both resumed positive year-on-year growth in March, and stocks returned to stability; on the other hand, reserves include “Dungeons and Warriors: Origins” (launched in May), “Wang Zhe Rongyao: Dawn of the Stars” (test in May), “Need for Speed: Assembly” (summer launch), and “Operation Delta” (March test).
Social networks: Quality content drives the growth in the number of paying users, and applet games provide high popularity and high-quality revenue. Achieved revenue of 35.0 billion yuan, YOY -2%, and QOQ +8%. Driven by music and video, the total number of people paying for value-added services was YOY +12% to 260 million. Among them, Tencent Video released a number of popular homemade TV series and animations, such as “Blossoming Flowers,” “Ice Hunting,” and “Perfect World Season 4,” which led to an 8% year-on-year increase in the number of paid members to 120 million. On the other hand, this quarter's applet game turnover YOY was +30%.
Advertising business: The WeChat ecosystem's traffic performance was impressive, driving revenue beyond expectations. It achieved revenue of 26.5 billion yuan, YOY +26%, and QOQ -11%, exceeding Bloomberg's unanimous expectations. It is estimated that it will mainly be contributed by the three major advertising products: video accounts, applets, and search. Traffic within the WeChat ecosystem was further activated. The usage time of video accounts and applet users was YOY +80% and 20%, respectively, and the average number of daily usage times of non-game applets YOY increased by double digits.
Fintech and corporate services business: Payments are under pressure, and GPM is at a record high. The quarter achieved revenue of 52.3 billion yuan, YOY +7%, QOQ -4%, and GPM of 45.6%; among them, the fintech business achieved single-digit growth, mainly due to a slowdown in payment revenue growth in offline scenarios due to lower consumer demand and increased willingness to save, and a decline in withdrawal revenue (that is, more funds are kept within the WeChat Pay system, forming change and monetary fund management), which in turn led to an increase in wealth management revenue, but monetization efficiency is still declining, so revenue growth has slowed down. The cloud and enterprise service business achieved YOY +10% growth. On the one hand, it was driven by the steady growth of cloud services, and on the other hand, it benefited from the increase in high-quality revenue from video e-commerce live streaming.
Capital expenditure increased sharply over the same period last year, reaching a new high in nearly 17 quarters; the capacity of the mixed-element model continues to iterate, so it is recommended to pay close attention to subsequent developments. 1Q24 capital expenditure reached 14.4 billion yuan, YOY +226%, and QOQ +91%, the second-highest in nearly 25 quarters. On the other hand, through continuous iteration, Tencent's mixed yuan model currently ranks first in the country. Some Chinese capabilities have rivaled GPT-4, and already support Wensheng maps, Wensheng videos, and Wensheng 3D models. Furthermore, the mixed-yuan Wensheng big model has already been announced as open source. The Wensheng Wensheng Big Model will be open sourced in the third quarter, and the application version “Tencent Yuanbao” will be launched on May 30. Investors are advised to pay close attention to the subsequent development of mixed yuan.
Profit forecast and investment advice: Considering the ability to release profits that exceeded expectations this quarter, we slightly raised our 24-26 revenue forecast to $6740/7331/785.4 billion (originally forecast was $6700/7277/781.4 billion yuan), YOY +11%/9%/7%; increase the NON-IFRS net profit forecast to $1992/2191/236.4 billion (the original forecast was $1827.19711.1 billion), YOY +26%/10%/8%. We gave the company a target PE of 20x for 2024, corresponding to a target market value of 3984.5 billion yuan and a target price of HK$464.84, maintaining a “recommended” rating. (The exchange rate is 0.91 RMB/HKD)
Risk warning: Product launch progress falls short of expectations; macroeconomic fluctuations; industry competition intensifies.