Incidents:
Tencent Holdings (0700.HK) released financial results for 2024Q1. 2024Q1 achieved revenue of 159.5 billion yuan (yoy +6%), gross profit of 83.9 billion yuan (yoy +23%, gross profit margin 52.6%), operating profit of 52.6 billion yuan (yoy +38%), net profit to mother of 41.9 billion yuan (yoy +62%), and non-IFRS net profit of 50.3 billion yuan (yoy +54%, non-IFRS net profit margin 32%).
By business:
Value-added services achieved revenue of 78.6 billion yuan (yoy -1%), of which:
Social network revenue fell 2% year over year to 35.5 billion yuan, mainly due to increased revenue from music and long video subscriptions, live video channels, and service fees for small game platforms, while revenue from live music and game streaming declined.
Domestic game revenue fell 2% year over year to 34.5 billion yuan, mainly due to the decline in revenue from “King's Glory” and “Peace Elite”, but this was mostly offset by strong growth in the recently launched games “Fearless Contract,” “Battle of the Golden Shovel,” and “Ark of Destiny.”
However, domestic game traffic increased 3% year over year in the first quarter, benefiting from the overall recovery trend in domestic business.
International game revenue increased 3% year over year to 13.6 billion yuan, while turnover increased 34% year over year, driven by contributions from “PUBG Mobile” and Supercell games. Due to the deferred confirmation cycle for game revenue, the revenue growth rate lags behind the turnover.
Online advertising achieved revenue of 26.5 billion yuan (yoy +26%), mainly due to increased user engagement and continued enhancement of AI-driven advertising infrastructure. With the exception of automobiles, ad spend increased in all major categories, particularly in gaming, internet services, and consumer goods categories. Tencent upgraded its ad technology platform to help advertisers build more effective advertising campaigns and provide all advertisers with generative AI-driven ad creation tools. For WeChat, video ad revenue increased by more than 100% year over year. Thanks to higher video views and click-through rates, applet advertising revenue increased by more than 40% year over year, benefiting from the closed-loop effect of mini-games. Long video ad revenue grew by double digits year over year, driven by popular homemade series.
Fintech and corporate services achieved revenue of $52.3 billion (yoy +7%), of which revenue from fintech services grew in single digits, mainly due to a slowdown in the growth of offline consumer spending and a decrease in withdrawal fee revenue. Revenue from wealth management services achieved strong growth, while enterprise services achieved double-digit year-on-year revenue growth, mainly due to increased revenue from cloud services and increased e-commerce technology service fees within video accounts.
Key operating data:
WeChat and WeChat combined monthly active users: 1,359 million, up 3.0% year on year. Number of registered subscribers to paid value-added services: 260 million, up 12.0% year on year
The total number of video account user hours increased by more than 80% year-on-year
The total user time of the applet increased by 20% over the same period last year. The daily activity of non-game applets grew at a double-digit rate, while total revenue from mini-games increased 30% year over year.
Long video subscriptions increased 8% year over year to 116 million. Music subscriptions increased 20% year over year to reach 114 million.
Comment:
The share of high-margin businesses increased, driving a significant increase in overall gross margin. Due to the rapid growth of revenue related to video accounts, applets/mini-games with high gross margins, and the decline in live entertainment revenue with relatively low gross margins, the company's overall gross margin increased dramatically, and the gross profit growth rate was higher than the revenue growth rate. In addition, online video, music subscriptions, cloud businesses, etc. have also achieved continuous optimization of gross margins. Looking forward to the future, we believe that businesses such as video advertising, video e-commerce, and mini games will continue to grow rapidly, driving the company's gross margin to continue to rise and achieve high-quality growth.
Profits from associated companies and joint ventures further contributed to overall net profit growth. The 24Q1 profit from associated companies and joint ventures was RMB 2.2 billion, a significant increase over RMB 100 million in the same period last year. On a non-IFRS basis, profit was RMB 5.5 billion, compared to a loss of RMB 100 million in the same period last year, mainly due to improved profitability of some domestic affiliated companies and reduced losses of some overseas affiliates. On the basis of higher gross profit growth, profits from associated companies and joint ventures further contributed to the increase in net profit.
The game business is growing steadily, and revenue growth is expected to bottom out and pick up. Domestic and international game revenue was lackluster year over year in 24Q1, but the revenue growth rate during the same period was higher than the revenue growth rate. Due to the delayed confirmation of game revenue, we believe that the higher revenue growth rate is expected to translate into a higher revenue growth rate in the next quarter.
Looking ahead to Tencent's new game pipeline in Q2 and beyond, we are optimistic about Tencent's game business outlook in 2024, and believe that subsequent revenue growth is expected to gradually pick up:
Domestic games: According to Sensor Tower data, since the game was officially released on May 21, the “DNF Mobile Game” mobile game has achieved revenue of up to 63 million US dollars on the Apple App Store in China alone. In addition, high-production value games that Tencent plans to release this year also include blockbusters such as “World of Taris,” “Need for Speed Mobile Game,” “One Piece Mobile Game,” and “Delta Special Forces: Operation Eagle,” and we expect that they will also contribute to the domestic game business.
Overseas games: Q1 Overseas games achieved a 34% increase in revenue, driven by Supercell's “Wild Brawl”, etc., and since April, the game's turnover has reached a new high. We think it is expected to give a strong boost to overseas game revenue after Q2. However, Supercell's new game “Burst Squad”, which launched on May 29, is still on the rise. It attracted 31.7 million downloads in the first week, with revenue of about $9.1 million (if data from the test launch period is taken, the game's cumulative downloads and revenue reached 42 million and 14.5 million US dollars, respectively), which is expected to further help overseas games.
Video advertising drives high overall advertising revenue growth, and there is broad room for medium- to long-term growth in video e-commerce. Benefiting from the increase in total video account user time, as well as higher video views and click-through rates, video account advertising revenue increased by more than 100% year-on-year, driving the overall advertising business Q1 to achieve a 26% increase in revenue. Looking forward to the future, we believe that there is still plenty of room for growth in the total user time of video accounts and ad views, which is expected to continue to drive steady growth in the advertising business.
The development of video e-commerce business is also another highlight of the video account monetization process. 24Q1 corporate service revenue increased by more than ten percentage points over the same period last year. Among them, technical service fees brought about by e-commerce transactions on video accounts contributed. According to E-Commerce Pro, the GMV for live video e-commerce in 2022 was about 40 billion to 50 billion yuan, and the GMV for WeChat video e-commerce in 2023 was around 100 billion yuan, achieving rapid growth. At the same time, WeChat is also gradually expanding its video e-commerce business team. In addition to the video live streaming team responsible for front-end products, the video e-commerce team is also drawing personnel from other departments of WeChat to join the construction of video e-commerce. On the afternoon of May 28, WeChat issued an internal announcement. The WeChat video live e-commerce team will be merged into the WeChat Open Platform (mini program, public account, etc.) team, and the former WeChat Video Live e-commerce team will be in charge of the WeChat Open Platform. This adjustment will help the WeChat video live streaming e-commerce business to be better integrated into the WeChat ecosystem, so that the video channel live streaming e-commerce can achieve more favorable development.
Looking forward to the future, we believe that with the gradual improvement of the e-commerce infrastructure of video channels and the development of user habits, the future GMV and monetization revenue (internal circulation advertising+technical service fees) of this business have a lot of room for growth, and video accounts are expected to become important players in the short video e-commerce industry.
The growth rate of the fintech business was limited by macroeconomics, and the gross margin of the corporate services business increased dramatically.
The growth of the payment business in the fintech business is slowing, mainly due to slow growth in offline consumer spending. Wealth management revenue grew strongly year-on-year, mainly driven by the rapid increase in the number of low-risk money market fund users and per capita fund investment amount.
While 24Q1 enterprise services achieved double-digit revenue growth, gross profit more than doubled year over year, thanks to higher profit margin revenue streams and improved business efficiency. Among enterprise SaaS products, enterprise WeChat revenue increased threefold year over year, as merchants increasingly paid for customer communication functions. Tencent's conference revenue doubled year over year, thanks to adoption and up-sales by enterprise customers. Looking ahead, we believe that with macroeconomic recovery and the company's continued development of various business segments in fintech and corporate services, this business sector still has great potential for growth in the medium to long term.
Shareholder returns will continue to be strengthened during the year, which is expected to support stock prices. In the first quarter, Tencent repurchased approximately 51 million shares on the Hong Kong Stock Exchange at a cost of approximately HK$14.8 billion. The company plans to repurchase more than HK$100 billion in 2024, continuing to enhance shareholder returns. We believe that the company's continued buybacks and cash dividends demonstrate the company's commitment to increasing shareholder value and are expected to provide strong support for stock prices.
Investment advice: We believe that although the revenue growth rate of the game business slowed during the quarter, the revenue performance was better than revenue; as new games are launched one after another, the subsequent game revenue growth rate is expected to bottom up, and the development of the mini game business is also worth looking forward to. The advertising and FBS business performed well in 24Q1. Video advertising led to a high increase in overall revenue and gross profit of the advertising business, and subsequent video accounts are expected to continue to drive steady growth in the advertising business. Financial and cloud businesses maintained healthy year-on-year growth, while overall gross margin reached record highs. In terms of costs and expenses, the company has achieved remarkable cost reduction and efficiency. The cost ratio is well controlled, and the adjusted net profit growth rate is significantly higher than the revenue growth rate. There is still a possibility that Tencent's profitability will be further released in the future.
Considering that the company's game business is expected to bottom out, the advertising growth rate continues to exceed expectations, and the gross margin and adjusted net profit margin increase significantly year over year, we expect the company's FY2024-2026 revenue to be 6666/7247/779 billion yuan, up 9.5%/8.7%/7.5% year on year, and non-IFRS net profit to the mother of 2080/2443/269.7 billion yuan, up 31.9%/17.5%/10.4% year on year, maintaining the “buy” rating.
Risk factors: Short-video platforms are being squeezed; the launch effect of game products falls short of expectations; stricter regulation of the platform economy, etc.