Overall performance: Revenue growth recovered, profits continued to improve. We expect 2Q24 revenue +8% YoY, gross profit +20% YoY, and non-IFRS net profit to mother +36% YoY
We expect Tencent's revenue in 2Q2024 to be around 161.9 billion yuan, +8% year-on-year, recovering from 1Q2024. Game growth began to recover, advertising continued to maintain high year-over-year growth, and FBS revenue growth declined somewhat month-on-month.
We expect the 2Q2024 company's overall gross profit to be about 85 billion yuan, +20% year over year; overall gross margin will be 52.5%, up 5.1 pct year on year, which is basically the same month on month. The share of high-margin incremental businesses (including mini-game sharing, video ads, fintech high-margin products, delivery technology service fees, etc.) is expected to continue to rise.
We expect 2Q2024's non-IFRS operating profit to be about 57.3 billion yuan, up 25% year on year; non-IFRS operating margin is about 35.4%, up 4.6 pcts year on year, and down 1.3 pct month on month. Considering the launch of the new heavyweight game “Dungeons and Warriors: Origins” in the second quarter, we expect sales expenses to increase month-on-month in 2Q2024, and overall may still be below the 4Q2023 level (at the time “Yuanmeng Star” was launched).
We expect 2Q2024's non-IFRS net profit to be about 51.1 billion yuan, up 36% year on year; non-IFRS net profit margin will be about 31.6%, up 6.4 pct year on year, and a slight increase of 0.1 pct month on month. We expect 2q2024 non-IFRS net profit to grow faster than operating profit. The main factors are: 1) It is expected that 2Q2024's share of profits and losses of joint ventures will continue to increase year-on-year due to the increase in profits of some key investment companies. 2) It is expected that 2Q2024 companies' non-IFRS income tax rates will decline year-on-year under a high base, or gradually return to the normal range.
Online gaming: We expect domestic and overseas game revenue to accelerate over several quarters. We expect 1Q2024's online game revenue to be +10.5% YoY, with revenue in the Chinese domestic market +9.6% YoY, and +13% YoY in the overseas market. Looking ahead, we expect Tencent's gaming business revenue to accelerate sequentially for several consecutive quarters, which is expected to drive the market's profit growth expectations and risk appetite to continue to increase.
1) Domestic games, “Dungeons and Warriors: Origins” ranked first in the iOS game bestseller list for 63 days in 73 days after launch on May 21. Referring to the “Wang Zhe Rongyao” traffic volume, we expect its incremental contribution to be significant, and Tencent's domestic game revenue will accelerate month-on-month over 3-4 quarters.
2) Overseas games, the excellent performance of “Wild Brawl” drove 1Q2024's overseas game sales volume to +34%. Since April, its iOS bestseller ranking in major markets has further improved compared to the first quarter. Combined with Supercell's new game “Squad Busters” being launched globally at the end of May, we expect Tencent's overseas game revenue to also accelerate over several quarters.
Online advertising: We expect revenue to be +19% year over year, and the trend continues; we expect gross margin to increase to 57%. We expect 2Q2024 advertising revenue to be +19% year over month, and +12% month-on-month, mainly due to continued healthy growth in video channel traffic, orderly advertising expansion, and AI technology platforms to improve delivery effectiveness. We expect the gross margin of the advertising business to increase to 57.3% in 2Q2024. Mainly due to the peak e-commerce season in the second quarter, the proportion of high-margin video ads is expected to increase further.
Fintech and corporate services: We expect revenue to be +6% year over year. Macro consumption may slightly affect fintech growth rate. We expect 2Q2024 fintech and corporate services revenue to be +6% year over year, a slight decline from 1Q2024. Mainly due to the slowdown in macro consumption, we expect the 2Q2024 fintech services revenue growth rate to fall back to a low single-digit level. The company's gross margin for fintech and corporate services continued to rise from 27.1% in 4Q2021 to 45.6% in 1Q2024, including the restoration of operating leverage driven by a recovery in macro demand, an increase in gross margin driven by cloud business restructuring, and the rapid development of service fees for video delivery technology. We expect the upward trend in business gross margin to continue in the medium term.
Investment advice:
The company's high-margin incremental business lays the foundation for a continuous increase in gross margin, and the higher-than-expected turnover performance of domestic/overseas games suggests that game revenue will accelerate sequentially over the next few quarters. We raised our 2024-2026 forecast non-IFRS net profit to 209.1/239.6/269.1 billion yuan (the original forecast was 204.7/235.6/264.8 billion yuan), with year-on-year growth rates of 33%/15%/12%, respectively.
As of 2024/8/4, the company's stock price corresponding to the 2024/2025/2026 forecast PE was 15x/13x/12x, respectively. The 12-month Bloomberg rolling forecast PE was below 1.4 standard deviations from the 5-year median, at the historical quantile of 8%. Compared to the NASDAQ, Bloomberg's 12-month outlook PE is 1.5 standard deviations below the 5-year median, at the historical quantile of 9%, and the valuation is relatively low. We expect game growth to begin to recover in 2Q2024, and it is expected that repurchases will resume after combining performance, which will help improve valuation constraints. Maintain the target price of HK$476 and maintain the “Buy” rating.
Risk warning: macroeconomic growth is uncertain; there is uncertainty about the launch of the company's new game; the pace of commercialization of AI technology is slower than expected.