Revenue is expected to increase 9.2% in 24Q2, and the profit side continues to increase. We expect Tencent 24Q2 to achieve revenue of 163 billion yuan (YoY +9.2%), including game revenue of 48.8 billion yuan (YoY +9.6%), social value-added service revenue of 30.4 billion yuan (YoY +2.5%), advertising revenue of 30 billion yuan (YoY +20%), fintech revenue of 42.2 billion yuan (YOY +5.0%), and corporate services of 9.7 billion yuan (YoY +15.0%). The estimated sales expenses ratio is 5.6%, and the general and administrative expenses ratio is 15.6% (of which R&D expenses ratio is 10%); NON-IFRS net profit of 48.9 billion yuan, an increase of 29% over the previous year; gross profit margin of 52.7%, and NON-IFRS net interest rate of 30.1%.
Wang Zhe's chicken is back on the rise. Q2 games are also expected to increase by 9.6%. 1) Domestic games: We expect Tencent's local game market revenue to increase 8% year over year to 34.4 billion yuan, mainly due to flagship products “Wang Zhe Rongyao” and “Peace Elite” benefiting from the new commercial pace and improvements in game content design. Since March 2024, the new game “Dungeons and Warriors: Origins” has remained at the top 2 of the iOS bestsellers list since its launch on 5/21 (7/2). We expect sales volume to exceed 5 billion yuan in the first month and surpass 20 in the first 12 months billion yuan. 2) Overseas games: The 24Q2 revenue is expected to increase 14% year over year to 14.4 billion yuan. The subsidiary Supercell “Brawl Stars” has been revitalized through operational iterations, etc., and has achieved rapid growth in DAU and turnover. At the same time, “Burst Squad Squad Busters” was launched on May 29. It has successively reached the top of the free rankings in more than 90 countries and regions, and is expected to further drive the growth of Tencent games. Among the follow-up products, the open world racing mobile game “Need for Speed: Assembly” was launched on 7/11. It is expected that the new Wang Zhe Rongyao IP game “Dawn of the Stars” will be launched during the summer, and the game trend is expected to accelerate in the second half of the year.
Advertising and commercial payments are expected to increase 15%/6.7% in Q2, respectively, due to a slowdown in the decline in consumer spending. We expect that although video numbers and algorithm optimization continue to drive the growth of advertising efficiency in the advertising business, the growth trend slowed down last year due to factors such as the high e-commerce base (according to Star Map data, total sales of comprehensive e-commerce platforms reached 571.7 billion yuan during the 2024 618 period, down 6.9% year on year), and we expect 24Q2 advertising revenue to increase 15% year on year. In terms of fintech, we expect the payment business to continue to be affected by the slowdown in offline spending growth starting in 24Q1, but at the same time, the benefits of money and financial management and other businesses are expected to grow rapidly. We expect revenue from fintech and corporate services to increase 6.7% year-on-year in 24Q2.
Profit forecasting and valuation analysis. We expect Tencent's net profit from 2024 to 2026 to increase by 30.8%, 14.5%, and 16.0% to 206.2 billion yuan, 236.1 billion yuan, and 273.9 billion yuan respectively. Our comprehensive 24-year non-GAAP net profit target valuation for Tencent Holdings 20X corresponds to a market value of RMB 4123.9 billion, corresponding to a target price of HK$474, maintaining the “Highly Recommended” rating.
Risk warning: Game market policies and regulations are getting stricter; risk that advertising revenue growth will slow down due to weak macroeconomic recovery; cloud business development falls short of expectations; risk of uncertain return on investment; and intensification of industry competition.