Recently, as the haze of "Black Monday" gradually dissipates, major markets have experienced a certain degree of rebound, and the Hong Kong stock market has also realized a nearly 2% weekly increase this week. It is worth looking forward to as Hong Kong's "stock king" Tencent will release its latest financial report on August 14. As seen on the previous performance release, Tencent touched the 400 Hong Kong dollar mark the next day and then broke through it on the third day. What surprises will Tencent's latest performance release bring to the market? For the upcoming second-quarter financial report, the market generally predicts that Tencent is expected to achieve a revenue of RMB 160.554 billion, a YoY growth of 7.6%, and earnings per share of RMB 4.26, a YoY increase of 58.15%. In addition, 36 analysts have given recommendations for the stock recently, with more than 90% giving a strong buy recommendation. The average target price for analysts is HKD 446.94, which has approximately 20% potential upside from the latest closing price.$Hang Seng TECH Index (800700.HK)$Also, the Hong Kong stock market has realized a nearly 2% weekly increase this week.

It is worth looking forward to as Hong Kong's "stock king" Tencent will release its latest financial report on August 14. $TENCENT (00700.HK)$As seen on the previous performance release, Tencent touched the 400 Hong Kong dollar mark the next day and then broke through it on the third day. What surprises will Tencent's latest performance release bring to the market?

For the upcoming second-quarter financial report, the market generally predicts that Tencent is expected to achieve a revenue of RMB 160.554 billion, a YoY growth of 7.6%, and earnings per share of RMB 4.26, a YoY increase of 58.15%.

In addition, 36 analysts have given recommendations for the stock recently, with more than 90% giving a strong buy recommendation. The average target price for analysts is HKD 446.94, which has approximately 20% potential upside from the latest closing price.

Focusing on this Q2 financial report, the market is mainly concerned with the growth of Tencent's game business, the monetization performance and prospects of advertising business under the promotion of video accounts, and the further improvement of overall gross margin under the drive of artificial intelligence.

1. Bloomberg expects that value-added services will have an expected income of RMB 78.137 billion, a YoY growth of 5.29%, of which game revenue is RMB 47.637 billion, domestic game revenue is RMB 33.494 billion, and international game revenue is RMB 14.143 billion; social network revenue is RMB 30.5 billion.

According to brokerage analysts, Tencent's game business has shown strong growth momentum and has achieved good results in both the domestic and international game markets. It is expected to achieve quarterly growth in multiple quarters, which is expected to significantly improve the market's expectations for its profit growth. The successful launch of Dungeon & Fighter: Origins in the domestic game market has been a key driving force. Since its launch on May 21st, the game has occupied the top spot on the iOS game sales ranking for 63 days, demonstrating a flow level comparable to that of Honor of Kings. This performance suggests that it will bring significant incremental contributions to Tencent's domestic game revenue, and its flow increment contribution is expected to be amortized within 6-12 months, driving its quarterly growth over the next 3-4 quarters.

In the domestic game market, the successful launch of Dungeon & Fighter: Origins has been a key driving force. Since its launch on May 21st, the game has occupied the top spot on the iOS game sales ranking for 63 days, demonstrating a flow level comparable to that of Honor of Kings. This performance suggests that it will bring significant incremental contributions to Tencent's domestic game revenue, and its flow increment contribution is expected to be amortized within 6-12 months, driving its quarterly growth over the next 3-4 quarters. In terms of domestic game revenue, Q2 2024 is expected to increase by 31% YoY (SensorTower/Qimai), a significant acceleration compared to Q1 (9% YoY), primarily due to the nearly RMB 5.7 billion incremental growth of the new game Dungeon & Fighter: Origins and the stable operation of old games such as Peacekeeper Elite/War-Forged.

In terms of domestic game revenue, Q2 2024 is expected to increase by 31% YoY (SensorTower/Qimai), a significant acceleration compared to Q1 (9% YoY), primarily due to the nearly RMB 5.7 billion incremental growth of the new game Dungeon & Fighter: Origins and the stable operation of old games such as Peacekeeper Elite/War-Forged.

In addition, "Fearless Pledge" has doubled in popularity compared to December 2023 and continues to climb.

At the same time, Tencent's international game market has also performed well. The sustained hot sales of "Brawl Stars" led to a YoY growth of 34% in Tencent's international game revenue in Q1 2024. Since April, its rankings on the iOS bestseller lists in major markets have further improved compared to Q1. In addition, the global release of Supercell's new game "Squad Busters" and the consideration of the deferred cycle of international game revenue are expected to bring several quarters of quarterly growth to international game revenue as well.

In terms of international game revenue, Q2 2024's revenue is expected to increase by 47% YoY (compared to 33% YoY in Q1), mainly driven by "Brawl Stars", with single-month revenue maintaining high level of RMB 0.7-0.8 billion.

As for small games, they continue to grow rapidly. According to Gamma Data, the small game market size in the first half of the year was RMB 16.6 billion, a YoY increase of 61%, with the proportion of in-game purchases rising 6.4 percentage points to 55%. On April 24, WeChat announced that its daily active user count for small games exceeded 500 million, with daily usage time surpassing one hour and 14-day retention rate exceeding 50%, indicating a continued penetration of small games into more people and stronger user mindset.

From the perspective of advertising expenditure, it is expected that sales expenses in Q2 2024 will increase compared to the previous quarter, mainly due to the launch of heavy new games such as "Dungeon & Fighter: Origins", but overall it may still be lower than the level of Q4 2023 (when "Pioneer's Star" was launched).

In addition, normalized issuance of domestic/import game licenses, policies supporting online games and esports, and game companies optimizing their Android channels are all providing a favorable external environment for Tencent's game business growth.

2. The network advertising business is expected to achieve a revenue of RMB 29.358 billion, a YoY growth of 17.41%. This is mainly due to the continued healthy growth of video accounts' traffic, the orderly expansion of advertising, the promotion of AI technology platforms to improve delivery efficiency. It is expected that the gross profit margin of the advertising business in 2Q2024 will increase to 57.3%, mainly due to the e-commerce peak season in the second quarter, with a higher proportion of high gross margin video ads on heads.

According to AppGrowing data, the proportion of game and short video advertisements has increased YoY, among which the dividends of short video platform traffic are gradually disappearing, while the number of users and their average time spent on video accounts still have potential for improvement; and there is still room for improvement in the inventory and loading rate of video account ads. In addition, on May 28th, WeChat announced that it will integrate Video Account livestream e-commerce into the WeChat open platform team, which may help to promote ecological integration. In addition, WeChat's internal testing of the intelligent delivery tool "All-Domain Pass" may further optimize content matching and advertising conversion rates.

In addition, WeChat announced on May 28th that Video Number live streaming e-commerce will be merged into the WeChat open platform team, which may help promote internal integration of the ecosystem. In addition, WeChat's internal testing of the intelligent delivery tool "Universal Pass" may further optimize content matching and ad conversion rates.

The expected revenue of the financial technology and enterprise service business in 3 is 52.422 billion yuan, a year-on-year increase of 7.7%. Mainly due to the slowdown in macro-consumption, Tencent's Q2 financial technology and enterprise service business revenue growth rate fell to a low single-digit level. It is expected that the gross margin of this business will remain consistent with Q1 at 46%.

In Q1, the gross margin of the financial technology and enterprise service business has significantly improved, jumping from 34% in the same period last year to 46%. This significant growth is mainly attributable to the contribution of wealth management services and technical service fees for video merchants, the commercialization of Enterprise WeChat and other enterprise service businesses, and the improved cost-effectiveness of cloud services after the restructuring.

The overall gross margin is expected to be 52.7%, although it has slightly decreased by 0.3% month-on-month, it has achieved a significant year-on-year growth of 5.7%. This improvement is mainly attributed to the continuous expansion of high-margin incremental businesses, such as small game revenue sharing, high-margin products in financial technology, and rapidly growing commission for merchandise delivery.

The estimated combined monthly active users of WeChat and WeChat are 1.356 billion, a slight decrease of 0.003 billion from Q1; the mobile terminal monthly active users of QQ are 0.567 billion, a slight increase of 0.014 billion from Q1; and the registered users of charged value-added services are 0.258 billion.

In addition, investors can also pay attention to the management's description of future cash dividends and repurchases, the promotion and operation of the next stage of games (especially Dungeon & Fighter: Origin, Peacekeeper Elite and other games), the integration of AI with WeChat scenarios in the current stage, the GMV of video merchants on Video Number, and the actual use of Tencent's Mixed Reality technology (such as video content production) and other key issues.

Editor/ping