Intelligent Wealth APP learned that Founder Securities released a research report stating that it strongly recommends Tencent (00700) with a target price of HKD 472. Based on its estimates, the compound annual growth rate of income and non-GAAP net income for the next two years is about 10% and 15%, respectively. The non-GAAP net profit is expected to be CNY 205.3 billion in 2024, assuming a dividend yield of approximately 5% (also considering the potential for an upward adjustment of the dividend yield). The bank predicts that Tencent's non-IFRS net profit attributable to equity holders will increase by 30.2%, 14.0%, and 14.2% in 2024, 2025, and 2026, respectively, reaching CNY 205.3 billion, CNY 234.2 billion, and CNY 267.3 billion.
The main viewpoints of Founder Securities are as follows:
With sustainable cash flow in hand, Tencent games await the "tipping point" of overseas products.
The Chinese gaming market has entered a market with limited growth opportunities for mega-hit products. However, given its substantial traffic resources and the strong social interactive features of the competitive genres with large daily active users (DAU), players' gaming experiences are based on interactions and challenges rather than consumption of game content, resulting in a longer lifecycle compared to other game types. With Tencent's ability to control income from head games, the overall game business of Tencent will be more stable and sustainable. Against this backdrop, going global becomes the biggest driver, and Tencent Games, with its 15-year accumulation and global network, can expect the outbreak of overseas 3A games.
With a steady foundation in advertising, what other surprises can video clips and AI bring?
The bank calculates that the scale of video advertising will be around CNY 50 billion in annual revenue in the medium to long term, with core variables being user session durations and ad loading rates. In addition, when e-commerce matures, there remains some room for growth in internal circulation advertising. The underlying logic is that the DAUs and other user data of video clips will have faster growth and higher ceilings, while usage duration and retention is determined by improvements in video clip recommendation and algorithm capabilities. The bank expects that once the user base and data are improved, the gap in recommendation and algorithms between the video clips and Douyin will gradually narrow, and commercialization space will gradually converge. In addition, with Tencent's continued investment and innovation in AI technology, there is hope that the gross profit margin of advertising business will continue to increase. Currently, in 2023, AI advertisements have generated revenue of USD 10 billion, accounting for about 8% of Tencent's advertising revenue. The bank expects that the efficiency brought by AI advertisements will increase by more than 20%.
Financial technology: the current pillar and hidden treasure.
The bank estimates a revenue of approximately CNY 168.6 billion and a gross profit of CNY 77.1 billion by 2023. Financial technology consists of payment business, wealth management business, and lending business, of which payment business accounts for approximately 83% and is the core source of revenue. The bank believes that the current competitive landscape of the financial technology industry is stable. If the macroeconomic conditions recover later, this financial technology sector, which is related to the ups and downs of the overall economy, will exhibit greater elasticity. The bank predicts that its revenue CAGR will be at the center of 10% for the next three years, making it the most important pillar and cash flow business for Tencent after gaming.
Enterprise services: The profitability of cloud computing continues to increase, and video clips and e-commerce contribute incremental revenue.
The bank forecasts that cloud business revenue will be CNY 35.2 billion in 2023, and video clips and e-commerce will begin commercialization by 2023. The revenue will be included in the enterprise services category. The bank estimates that the commission revenue from e-commerce will be approximately CNY 0.43 billion in 2023. Compared with the net profit margin of 5.8% for Aliyun in FY2024, Tencent's cloud business profitability is promising, mainly due to its cost-saving measures and AI strategy. The bank estimates that the scale of e-commerce commission revenue will be about CNY 15 billion in the medium to long term, with the core variables being the richness of product categories and user purchase frequency. The bank believes that after e-commerce matures, boosting revenue from internal circulation advertising is more important than commission revenue.
Shareholder returns and share reductions: A game that upholds the value of value stocks to the end.
Based on the current market value, the bank calculates that with dividends and buybacks, Tencent's overall shareholder returns for 2022 and 2023 will be 5.05% and 7.95%, respectively. In addition, from Q3 2023 to Q1 2024, Tencent has repurchased more shares than the amount sold by major shareholders for three consecutive quarters, and plans to double its share repurchase amount to more than HKD 100 billion in 2024. The bank believes that with Tencent's annual free cash flow of nearly CNY 200 billion, there is still considerable room for improvement in shareholder returns from the perspective of share repurchases.