Incident: Tencent announced results for the first quarter of 2024. 2024Q1 achieved operating revenue of 159.50 billion yuan (yoy +6%) and non-IFRS net profit of 50.27 billion yuan (yoy +54%).

Comment:

Revenue is growing steadily, and the growth rate of online advertising is increasing. 2024Q1, the company achieved revenue of 159.50 billion yuan, an increase of 6% over the previous year, of which:

Revenue from value-added services was 78.63 billion yuan, down 0.9% year on year. Among them, game revenue in China was 34.5 billion yuan, down 2% year on year; overseas game revenue was 13.6 billion yuan, up 3% year on year; social networking revenue was 35.5 billion yuan, down 2% year on year; the slight year-on-year decline in domestic game revenue was mainly due to the decline in revenue of “Wang Zhe Rongyao” during the Spring Festival and weak commercialization content of “Peace Elite” in the second half of 2023. This decline was partially offset by revenue contributions from recently released games “Dreadnought Contract” and “Ark of Destiny,” as well as strong growth in “Battle of the Golden Shovel,” “Cross Fire Mobile Game,” and “Break Through the Dark Zone.” The increase in overseas game revenue is mainly due to a resurgence in the popularity of “Wild Brawl”. The game's sales volume surpassed four times that of the same period last year, and the increase in users and sales of “PUBGMOBILE”. Social networking revenue fell 2% to 35.5 billion yuan, mainly affected by the decline in revenue from live music streaming and game streaming services;? Online advertising amounted to 26.506 billion yuan, an increase of 26% over the previous year, mainly due to a recovery in domestic consumption and an increase in advertising spending. Increased user engagement on WeChat video accounts, applets, public accounts, and Suyisou is driving the continuous upgrading of AI-driven advertising technology platforms. Among them, advertising expenses in industries represented by games, internet services, and consumer goods increased significantly;? Fintech and corporate services revenue was $52.30 billion, up 7% year over year. Among them, the year-on-year growth rate of fintech services slowed, mainly due to a slowdown in offline consumer spending growth and a decrease in withdrawal revenue, while revenue from financial services grew strongly; the year-on-year growth rate of enterprise service revenue achieved a year-on-year increase of more than ten points, due to the increase in revenue from some cloud services and technical service fees for video merchants;

Looking ahead to 2024, domestic game versions will be normalized, the company will maintain game research and development, and the game business is expected to continue to grow; the domestic macroeconomy will further recover, and the advertising business, digital content, financial payment, financial management business, and Tencent Cloud enterprise services will maintain steady growth.

The results of reducing costs and increasing efficiency have been remarkable, and net profit has risen sharply. (1) 2024Q1, the company's overall gross profit margin was 52.6%, up 7.1 percentage points year on year, of which the gross profit margin for value-added services was 57.3%, up 3.4 percentage points year on year, the gross profit margin of online advertising was 54.8%, up 13.1 percentage points year on year, the gross profit margin ratio of fintech and enterprise services was 44.8%, up 10.3 percentage points year on year; the increase in the company's gross margin was mainly due to video WeChat and search advertising revenue, small game platform service fees, financial services revenue and video number merchant technical service fees; (2) sales expenses of 75.4 billion yuan The sales expense ratio was 4.72%, up 0.05 percentage points from the previous year; management expenses were 24.81 billion yuan, down 0.9 percentage points from the previous year; the increase in sales expenses stemmed from increased publication and promotion of new content, but the sales rate remained stable; (3) Net profit from non-IFRS was 50.26 billion yuan, up 54% year on year, and the net profit margin was 31.5%, up 9.8 percentage points year on year.

The video ecosystem continues to expand, and AI helps business grow. The total number of monthly active users of 2024Q1, WeChat and WeChat was 1,359 million, an increase of 3% over the previous year. Video account user usage continued to grow, user usage time increased by more than 80% year on year, and video playback volume increased; applet user usage time continued to increase, average daily usage of non-game applets achieved a double-digit percentage increase year on year, and mini game traffic increased 30% year over year. Tencent Video released a number of popular homemade TV series and animation series, such as “Blossoming Flowers,” “Ice Hunting,” and “Perfect World Season 4,” which led to an 8% increase in the number of paid Long Video members. At the same time, TEM strengthened its collaboration with Tencent Video to release the hit series “With Fengxing”. On the AI side, the company is investing heavily in building artificial intelligence capabilities and cloud infrastructure.

In October 2022, Tencent Cloud completed the first trillion-parameter AI large model (mixed element NLP large model training). In 2023, the AI virtual character app “Unaccompanied” was launched. The app allows users to set names, appearance, and personalities to create unique virtual friends. In May 2024, the AI assistant app “Tencent Yuanbao” was launched, which integrates various functions such as AI search, AI summary, and AI writing.

Profit forecast and rating: With domestic macroeconomic recovery, corporate organizational optimization, and cost reduction and efficiency, we expect the company's net profit to be 171.6 billion yuan, 188.9 billion yuan, and 209.7 billion yuan respectively in 2024-2026. Corresponding to current stock prices, PE is 19X, 17X, and 16X, respectively, maintaining the “Highly Recommended” rating.

Risk warning: (1) AI technology is progressing less than expected; (2) commercialization of video accounts is progressing slowly; (3) advertising recovery falls short of expectations; (4) key new game products are underperforming online.