Key points of investment
The company achieved revenue of 161.1 billion yuan in 24Q2, up 8.0% year on year and 1.0% month on month, which is basically the same as Bloomberg's agreed expectations. The monetization rate of the WeChat ecosystem continued to decline, partly offset by negative macroeconomic effects. The gross profit margin was 53.3%, up 5.8 pct year on year, 0.7 pct month on month, higher than the agreed estimate of 3.0 pct. The gross margin of value-added services/advertising/financial services business was higher than the consistent forecast of about +2.4/1.4/4.2 pct, respectively. Non-IFRS net profit was $57.31 billion, up 52.6% year over year and 14.0% month-on-month, higher than Bloomberg's agreed forecast of 27.3%. The net profit growth rate significantly exceeded the revenue growth rate, mainly due to the increase in gross margin exceeding expectations, and further due to cost control exceeding expectations.
We estimate that the company's net profit due to non-IFRS in 24/25/26 was 216.5/247.9/279.2 billion, with a year-on-year growth rate of 37.3%/14.5%/12.7%, corresponding to the current stock price PE of 14.8/12.9/11.5 times. We gave the company 16 times PE for 25 years, corresponding to a market value of 3966.3 billion yuan = 4264.8 billion HKD (the HKD/RMB exchange rate made the average price of 0.93 in March), corresponding to the stock price HK$456.5, up 23.9% from the current stock price, maintaining the “buy” rating.
Steady performance in operating data
WeChat's MAU reached 1.371 billion, up 3.0% year on year and 0.9% month on month; QQ's MAU reached 0.571 billion, which was basically the same year on year, up 3% month on month.
The length of video accounts increased significantly. The total usage time of applet users increased by more than 20% year-on-year, applet GMV achieved double-digit year-on-year growth, and total minigame turnover increased by more than 30% year-on-year.
Scale opens up space for monetization, and streamlining the organizational structure to support further commercialization. According to Tech Planet, on May 28, Tencent officially announced the WeChat e-commerce organizational structure adjustment: the video live e-commerce team will be merged into the WeChat open platform
Local game revenue improved year on year. We are optimistic about the long-term performance of “DNF” value-added service business revenue of 78.8 billion yuan, up 6.2% year on year and 0.3% month on month, higher than Bloomberg's agreed forecast of 0.8%. Among them:
Game revenue (excluding social networking) was about 48.5 billion yuan, up about 9% year over year and 1% month-on-month, higher than Bloomberg's agreed forecast of about 2.5%. 24Q2 deferred revenue was 1.3 billion yuan, achieving a year-on-year and month-on-month increase of 15.6/1.2% (24Q1 company's deferred revenue increased 20.86 billion yuan, 23Q4 increased 14.96 billion yuan).
According to the operating area:
Domestic: Game revenue in the local market was 34.6 billion yuan, up 9% year on year. The year-on-year growth rate of domestic game revenue was positive this quarter, -2% year-on-year in the previous quarter. The sales volume of the flagship games “Wang Zhe Rongyao” and “Peace Elite” both resumed year-on-year growth this quarter. “DNF”, which was released in May, has activated millions of IP fans, has good retention, and is expected to become a new revenue pillar. According to Sensor Tower, the “DNF” mobile game had strong monthly sales performance after release, surpassing “Wang Zhe Rongyao” in June-July. The latter declined back in July after the June sales decline, but the year-on-year growth did not correct. Many other games experienced seasonal declines after the Spring Festival. According to the financial report of developer Nexon, according to the reported and fixed exchange rate, Nexon's revenue in China for 2024Q2 was about 2.7/2.5 billion yuan, an increase of nearly three times over the previous year. We expect DNF's 12-month turnover could reach 15 billion.
Overseas: Game revenue in the international market was 13.9 billion yuan, up 3% year on year. Based on reporting and fixed exchange rates, the year-on-year increase was 9%. Thanks to the strong performance of “PUBG MOBILE” and the increase in popularity of Supercell's games, the growth rate of total overseas sales significantly exceeded the revenue growth rate. After the operating strategy was adjusted last year, Supercell's products continued to gain strength. The average number of daily active accounts in the “Wilderness” quarter reached a record high, ranking third among mobile games in the international market in terms of the number of daily active accounts, and the turnover increased more than tenfold over the previous year.
Social network revenue was 30.3 billion yuan, up about 2% year on year, down about 1% month on month, and down about 1% from Bloomberg's agreed forecast. Thanks to increased revenue from paid members for music and long video games and increased sales of mini game platform service fees and mobile game virtual items, this was partly offset by the decline in revenue from live music and game streaming services. Thanks to the supply of high-quality content such as “Celebrating the Years 2” and “Living with the Phoenix”, the number of users paying for value-added services increased 12% year over year, the number of paid members for long video increased 13% year over year to 0.117 billion, the number of paid members in the music business increased 18% year over year to 0.117 billion, and ARPU decreased 15.9% year over year.
Ad revenue exceeded expectations, and video accounts buffered macroeconomic pressure
Online advertising revenue was 29.9 billion yuan, up 19.5% year on year, up 12.7% month on month, higher than Bloomberg's agreed forecast of 15.8%. Driven by strong revenue growth from video accounts and long videos, advertising revenue exceeded expectations, partly offset by a decline in mobile ad network revenue due to Internet service companies' budget cuts.
Consumption was poor, payments were frustrated, and corporate services gathered to monetize
Revenue from the fintech and corporate services business was $50.4 billion, up 3.7% year over year, down 3.6% from month to month, lower than Bloomberg's agreed forecast of 10.5%. The lower than expected was mainly due to poor consumer spending, which led to a slowdown in the growth rate of Jinke's revenue to a low single digit. Increased risk management and control measures led to a decline in consumer loan service revenue, which was partially compensated by the double-digit increase recorded in revenue from financial management services. Enterprise service revenue recorded a year-on-year increase of more than ten percent, due to the increased commercialization of WeChat and the contribution of corporate WeChat and video e-commerce technical service fees, and low gross profit enterprise service projects maintained a trend of strategic contraction
Effective cost control and staff expansion as needed
The company's gross profit margin was 53.3%, up 5.8 pct year on year, up 0.7 pct from month to month, higher than Bloomberg's agreed forecast of 3.0 pct. The gross margin of the main business increased significantly this quarter. The gross margin of value-added services/advertising/Jinke enterprise service business was +3.1/6.7/9.2 pct year on year, -0.2/0.9/2.0pct, higher than the agreed forecast of about +2.4/1.4/4.2pct. Essentially due to cost reduction and efficiency exceeding expectations. Operating costs for the current period decreased year on year. Operating costs for the current quarter were 75.2 billion yuan, down 4.0% year on month, and 0.5% month-on-month, mainly due to reduced cost sharing of long video content and live streaming revenue, and cloud project deployment cost optimization .
Level of operating expenses:
1) Marketing expenses: accounting for 5.7% of revenue, up 0.1 pct year on year, 1.0 pct, lower than Bloomberg's agreed forecast of 0.2 pct. The year-on-month increase was mainly due to publicity demand brought about by the launch of “dNF”; 2) General and administrative expenses: accounting for 17.1% of revenue, which remained unchanged year on year, up 1.5 pct from month on month, higher than Bloomberg's agreed estimate of 0.4 pct. By the end of the Q2 period, the number of employees in the company was 0.106 million, up 1.0% year on year and 0.7% month on month. The monthly salary per person in Q2 was 0.089 million, up 4.7% year on year and 8.1% month on month.
By the end of the Q1 period, the number of employees and monthly salary per capita both declined year on year, and the company replenished its manpower as needed this quarter.
Overall, the company achieved non-IFRS net profit of 57.31 billion yuan in Q2, up 52.6% year on year and 14.0% month on month, higher than Bloomberg's agreed forecast of 27.3%. The non-IFRS gross profit margin was 53.3%, up 5.8 pcts year over year and 0.7 pct month on month, higher than the agreed estimate of 3.0 pcts.
Investment advice
Looking ahead to the second half of '24, we maintain our previous judgment: revenue side is steadily delivering on expectations, games are on the rise and remain on a high platform, advertising is driven by multiple wheels such as video numbers and mini-games, which can effectively offset the impact of poor consumption and maintain a high growth trend. The negative impact of financial technology business in the short to medium term is difficult to eliminate, waiting for live e-commerce to release further increases; profit-side companies are determined to reduce costs and increase efficiency. However, under the influence of “DNF” IP segmentation, the gross margin of service value-added increased or slowed in the second half of the year.
We estimate that the company's net profit due to non-IFRS in 24/25/26 was 216.5/247.9/279.2 billion, with a year-on-year growth rate of 37.3%/14.5%/12.7%, corresponding to the current stock price PE of 14.8/12.9/11.5 times. We gave the company 16 times PE for 25 years, corresponding to a market value of 3966.3 billion yuan = 4264.8 billion HKD (the HKD/RMB exchange rate made the average price of 0.93 in March), corresponding to a stock price of 456.5 The Hong Kong dollar, with room for an increase of 23.9% from the current stock price, maintains a “buy” rating.
Up to now, the company's total repurchases are about HK$61.4 billion. According to the previous HK$100 billion repurchase plan, the retained repurchase amount was HK$38.6 billion. The steady pace of repurchases shows the company's confidence.
Risk warning
The risk of macroeconomic fluctuations, which may cause fluctuations in advertising and financial business; the risk of new tourism performance falling short of expectations; the risk of regulatory policy, mainly in the financial services sector; and the risk of AI technology development falling short of expectations.