Introduction to this report:
The game business is picking up, and advertising is growing well, offsetting the pressure of the slowdown in FBS growth. Social networks are growing steadily, and profitability continues to increase.
Key points of investment:
Profit forecast and valuation: We adjusted Tencent's FY2024/FY2025 revenue to 654.3 billion yuan/703.7 billion yuan (RMB, same below) (previous value was 653.8/702.1 billion yuan), up 7.4%/7.5% year over year. Adjusted net profit for FY2024/FY2025 was 197.2/222.5 billion yuan (corresponding to the previous value of 196.2/221.9 billion yuan), up 25.0%/12.9% year-on-year. The 2024 non-IFRS net profit was given 20x PE, and the 2024 target price was HK$462, maintaining the “increase” rating.
We expect Tencent FY24Q2 to achieve revenue of 160.4 billion yuan, an increase of 7.5% over the previous year. The game business is picking up, and advertising is growing well, offsetting the pressure of the slowdown in FBS growth, and the steady growth of social networks. The gross margin of FY24Q2 is expected to reach 52.9%, a slight increase over the previous month, mainly due to the increase in the gross margin of the advertising business. Sales expenses rate 5.0%, general and administrative expenses rate 16.5%.
The adjusted net profit for FY24Q2 is estimated to be 47.7 billion yuan, an increase of 27% over the previous year.
We expect the game business to pick up, with FY24Q2 revenue of 46.5 billion yuan, up 4.6% year over year.
Among them, domestic game revenue was 33.1 billion yuan, and overseas market game revenue was 13.5 billion yuan. Looking at specific games, 2024Q2, the new product “DNF Mobile Game”, performed well. As of July 10, the game's revenue in the Chinese iOS market has exceeded 0.4 billion US dollars, and we expect the turnover to reach 20 billion in 2024. The MAU of Evergreen Games “Wang Zhe Rongyao” and “Peace Elite” both declined year over year, but the MAU of “Battle of the Golden Shovel” and “League of Legends Mobile Games” increased steadily year over year. Supercell's new game “Burst Squad” performed well, earning 9.1 million dollars in the first week, and “Brawl in the Wild” continued to grow.
Advertising growth is expected to be good, FBS growth is slowing slightly, and social networks are growing steadily. We expect video accounts to drive FY24Q2's online advertising revenue to 30.8 billion yuan, an increase of 23% over the previous year. Video channels are developing rapidly, the live streaming ecosystem is gradually improving, and transaction volume continues to grow month-on-month. There were 3, 6, and 9 anchors with GMV breaking 100 million in a single month from April to April 2024. It is expected that subsequent live e-commerce will continue to contribute revenue growth to internal circulation advertising; we expect FY24Q2 social network revenue to be 30.2 billion yuan, an increase of 1.5% over the previous year. On the traffic side, the user MAU is relatively stable, and the total time period continues to grow. We expect FY24Q2 Jinke Enterprise Services revenue to reach 51.6 billion yuan, an increase of 6.0% year on year. The slowdown in revenue growth is mainly affected by weak offline consumption. It is expected that the share of revenue from financial services will increase, leading to an improvement in gross margin.
Risk warning: Consumption recovery falls short of expectations; stricter regulations; progress in AI technology and applications falls short of expectations; new game launches fall short of expectations