The outstanding performance of “Dungeons and Warriors” and Supercell drove the acceleration of game revenue growth. Have confidence in the future of advertising growth.
Tencent focuses on high-quality growth, and the strong expansion of profit margins is sustainable.
Maintaining the “Buy” rating, the SOTP target price was raised to HK$485.00 (21 times 2024 P/E).
Gaming: Based on the strong performance of Dungeons and Warriors and Supercell games, we raised our 2Q24/ 2024 game revenue forecast to increase 7%/9% year over year (previously 5%/5%). Local market: As the “Dungeons and Warriors” release in May gradually confirm revenue, we predict that the year-on-year growth in game revenue in the 2-4 quarter of 2024 will accelerate from -2% in the first quarter to 5%/9%/14%. “Dungeons and Warriors” ranked 3rd and 1st respectively on the iOS bestseller list in China in May and June. We expect the game to generate 10 billion yuan in revenue in 2024. At the same time, we expect this game to have limited encroachment on Tencent's other Big Day Active games, because in our opinion, there should be very few overlapping users. International market: Supercell's old game “Brawl in the Wild” has performed well since the beginning of the year, ranking 8th and 7th in the US iOS bestseller list in 5/6. Combined with the new release of “Burst Squad,” we expect this to accelerate game revenue growth in the international market from 3% growth in 1Q24 to 13%/18%/28% in the 2-4 quarter 2024.
Online advertising: As social ads and media ads increased by 20%/6% respectively, we slightly lowered our 2Q24 online advertising revenue forecast to 18% year over year (previously 22% forecast). Considering Tencent's optimal product quality, large user base and increased user usage time, strong targeting and attribution capabilities, and still low load rates, we still have strong confidence in Tencent's advertising growth potential. Our reduction was mainly due to last year's high base (34% advertising growth in 2Q23, 17% compared to 1Q23) and the overall weak macro environment. Despite this, we are still optimistic that Tencent will outperform the industry's growth this year. We slightly reduced the year-over-year growth rate of total advertising revenue from 21% to 20% in 2024.
Fintech and corporate services: We slightly lowered our revenue forecast for the 2Q24 sector to 4% from 6% previously. Among them, we forecast a 4% year-on-year increase in fintech revenue and a 7% increase in cloud business revenue. The pressure on fintech revenue is mainly due to tepid overall offline consumption and retail/consumer service activities. Furthermore, it has also been hampered by falling withdrawal fees. We expect the cloud business to maintain healthy revenue growth and profit margin performance.
Profitability: We maintained our forecast for an adjusted operating margin of 35.4%/35.9% for 2Q24/2024, with a year-on-year increase of about 410/440 basis points, and an adjusted net interest rate of 29.9%/30.8%, an increase of about 710/490 basis points year-on-year. We anticipate that improvements in the revenue structure towards higher-margin businesses and operating expenses focused on ROI will support Tencent's profit margin increase. In terms of shareholder returns, Tencent has repurchased approximately HK$61 billion worth of shares as of July 11 this year (4Q23: target to repurchase over HK$100 billion by 2024).
Reiterating the “Buy” rating, the SOTP target price was raised to HK$485.00.
Risk warning: Macro weakness, slow monetization, low return on investment.