We expect Tencent Holdings to achieve operating income of 161.8 billion yuan in 2Q24, an increase of 8% year on year; adjusted net profit to mother of 47.7 billion yuan, an increase of 27% year on year. By business, it is expected that games will improve as scheduled, advertising and FBS will continue to grow in double digits, and profitability will remain high.
“DNFM” exceeded expectations, and the game accumulated upward momentum, and there was strong certainty throughout the year. We expect Q2 games to grow 6% year over year, with domestic/overseas growth of 5%/8% year over year, respectively. In the local market, “DNFM”'s first-month turnover exceeded expectations. Considering delays, its revenue will not be fully reflected in Q2, but it is saving energy for growth in the second half of the year; “Golden Shovel” and “Dark Zone” showed significant year-on-year growth; and “Wang Zhe” and “Peace” changed in March to build an important basic market for Q2. In overseas markets, “Battle in the Wilderness” continued to rise month-on-month, and the gradual release of delays led to an acceleration in Q2 overseas; the long delay period also ensured that overseas growth continued to be realized in the second half of the year. Overall, “DNFM” and “Wilderness” have guaranteed certainty in game growth this year; at the same time, the flagship game Evergreen's strategy has become more clear, and “Peace” has achieved remarkable commercial optimization results for the new season at the end of May; “Wang Zhe” also began a major version update at the end of June.
In the pipeline for the second half of the year, “Need for Speed: Assembly” was launched on July 11 to reach the top of the iOS free list, as well as “Breaking Stars”, “Operation Delta”, and “Rock Kingdom: World.”
Advertising continues to grow rapidly, and demand for video accounts is still strong. We expect Q2 ads to grow 17% year over year, and slow down compared to Q1 due to the upward trend in the base. Video accounts are the core driver of growth. Currently, video accounts are still mainly driving growth by increasing time, increasing conversion rates, etc., and have not yet reached the ceiling. The loading rate has a lot of room to improve compared to similar platforms; AI and other technologies are very helpful in improving ad conversion rates and fill rates. Video e-commerce currently focuses on infrastructure construction, and in the future, it has great advantages in collaboration with enterprises, micro enterprises, and applets.
Payments are strongly correlated at the macro level, and cloud growth is steady. We expect FBS (Fintech and Cloud) to grow 11% year over year in Q2.
Among them, fintech is expected to grow 6% year on year, with relatively weak macroeconomic impact, but its share is stable; the cloud business is growing 12% year over year, maintaining steady growth and maintaining high quality growth; and video technology service fees follow GMV's rapid growth. On the AI side, benefiting from the platform ecosystem, the company has strong scenarios and data advantages in application (such as Tencent Yuanbao, etc.); in terms of business empowerment, advertising is the most obvious manifestation.
Profitability remains high. We expect Q2 gross margin and adjusted net margin to be 51%/30%, respectively, up 3 pct/4 pct year over year; a slight decrease from month to month; the Q2 advertising gross margin is expected to continue to rise and VAS to decline (the gross margin of “DNFM” is lower than self-developed); the sales expenses ratio is expected to increase slightly from month to month due to the impact of new game launches, etc.
Raise the profit forecast and maintain the buying rating: We consider that the game trend is improving. There is still room for improvement in the medium- to long-term profit margin of the video account business. The profit forecast is estimated to be 206/242.2/277.8 billion yuan for 24-26 (the original forecast was 202.5/229.3/258.9 billion). We raised our target price from HK$473 to HK$528, maintaining our buy rating based on 35% room for growth.
Risk warning: Changes in internet finance regulations, changes in game regulation, macroeconomic recovery falls short of expectations.