2Q revenue is expected to increase 8% year over year, and gross margin continues to improve
Looking ahead to Tencent's 2Q business, we expect total revenue to increase 8% year over year, with VAS, advertising, and finance businesses growing 4.7%, 21.5%, and 6.2% respectively. After the launch of Tencent's “DNF” mobile game in May, sales volume remained high. The total length of video accounts grew rapidly, and all business lines maintained high-quality growth. We expect the company's gross margin to improve by 5.8 pct to 53.3% year on year, and adjusted net profit increased 33% to 50 billion year on year.
Looking ahead to 24-26, we adjusted Tencent's revenue forecast by -0.3/-0.4/ -0.4%, respectively, and raised the adjusted net profit forecast by 5.6/7.4/ 8.1% to 218.3 billion, 249 billion, and 279.6 billion yuan (mainly the increase in gross margin across the entire business line). Based on the SOTP valuation, we gave a target price of HK$487.62 (previous value of HK$451.75), maintaining a “buy” rating.
2Q game sales are growing strongly. Revenue may be affected by the deferral cycle. We expect total game revenue to increase 9% year-on-year in the second quarter. In China and overseas, respectively, +8.6/ 10% yoy, 2Q new game sales contributed significantly, and the pace of revenue growth will be slightly slow (the delay cycle is too long). Looking at domestic games, the “DnF” mobile game remained high in the iOS bestseller list after it went live on May 21, and we expect sales to reach 15-18 billion in 12 months. “Peace Elite” upgraded the picture quality and introduced a new gameplay. After March, sales volume began to increase positively over the same period last year. Looking at overseas games, “Wilderness Brawl” re-introduced commercial monetization methods such as random rewards. 2Q sales increased net of 0.201 billion US dollars over the same period last year, and the new game “Burst Squad” in the casual MOBA category also performed well when launched. We expect VAS gross margin to continue to rise in 24, and the share of main channel expenses and live streaming revenue will improve.
The video number entered a 2Q high base, and the advertisement was published on Global Communications products
We expect 2Q Tencent's advertising revenue to increase 21.5% year over year, and gross margin to improve 7.8 pct to 56.7%.
The driving force of advertising is mainly due to the increase in ad inventory and the total length of video numbers and friend circles, but it is necessary to consider the impact of video number 2Q entering a high base. The number of game edition approvals increased in '24, and with the arrival of the peak summer season in June-August, we expect Tencent's market share to expand further. From a business perspective, the video channel “Global Connect” service was officially released in May to improve advertising reach people and service efficiency. Looking at the product, the advertising system has been upgraded to version 3.0 and supports mobile devices. Through a mixed element model and a new ID system, recognition capabilities are improved, bringing better delivery results.
The payment business is slowly recovering, and live e-commerce is gradually gaining momentum
We forecast a 6.2% year-on-year increase in 2Q and an increase in gross margin of 7.6 pct to 46.0% (improvement in the share of financial management and consumer loans). We expect 2Q payment revenue to maintain a slow recovery trend. The year-on-year growth rate is median, and corporate services will increase by nearly 15% year-on-year, mainly GMV, a live streaming e-commerce company. We believe that during Double Eleven, live e-commerce will bring more contributions. Looking at the organizational structure, in May, the live e-commerce team merged into the WeChat Open Platform (applet and public account), leveraging the WeChat ecosystem to accelerate the pace of commercialization. From a business perspective, while improving the user experience of small video stores, WeChat introduced a number of policies to support merchants to start cold, and launched the Butterfly Program in April to attract new e-commerce experts.
Risk warning: The payment growth rate is lower than expected, operating expenses have exceeded expectations, and the game deferral period is longer than expected.