Core views:

Tencent released its 24Q2 quarterly report: 24Q2 revenue reached 161.1 billion yuan, YOY/QoQ +8%/+1%, vs. consistent expectations (Bloomberg, same below) of 161.35 billion yuan. 24Q2 NongAAP's net profit to mother reached 57.3 billion yuan, YOY/QoQ +53%/+14%, vs. consistent expectations of 48.67 billion yuan (over 18%). NongAAP's diluted earnings per share were $6.01, YoY +55%, and QoQ +14%.

Games resumed growth in 24Q2, advertising was bright, and the financial business was dragged down by weak consumption. (1) 24Q2 game revenue was 48.5 billion yuan, YOY/QoQ +9%/+1%, higher than the agreed estimate of 47.3 billion yuan. Domestic and overseas game revenue both increased 9% year over year, domestic evergreen games recovered, and the new product “Dungeons and Warriors: Origins” contributed more. (2) 24Q2 social network revenue was 30.3 billion yuan, YoY +2%, QoQ -0.6%. Thanks to the growth of businesses such as music, long videos, and mini games. (3) 24Q2 advertising revenue was 29.9 billion yuan, YoY +19%, QoQ +13%, vs. the agreed forecast was 29.4 billion yuan (over 1.74%), driven by the growth of video numbers and long video ads. (4) 24Q2 financial and corporate services revenue was $50.4 billion, YoY +4%, QoQ -4%, vs. the agreed forecast of $52.4 billion. Financial business slowed to low single-digit growth due to weak consumption. The growth in enterprise services is relatively steady, mainly benefiting from the increase in corporate WeChat and video streaming technology service fee revenue.

Profit forecast and investment advice: “Dungeons and Warriors: Origins” performed well. We believe it will become a new member of Tencent's Evergreen Gaming Array, and the game's performance will restart growth. Advertisements have shown strong resilience, and the WeChat commercial acceleration closed loop should be expected to boost the advertising and e-commerce transaction ecosystem. The technology side has invested in the AI+ product matrix, and personnel and R&D expenses have increased to a certain extent. We expect the company's revenue to reach 658.7 and 715 billion yuan in 24-25, an increase of 8.2%/8.5%. The adjusted net profit to mother is estimated to be 216.6 and 242.5 billion yuan, an increase of 39.7% and 12.0%. Based on 24-year revenue and performance, the reasonable value is HK$453.34 per share based on SOTP. Maintain a “buy” rating.

Risk warning: Stricter regulations, stricter game version reviews, and the risk of being squeezed by short videos.