Incidents:
Tencent 24Q2 achieved revenue of 161.1 billion yuan, up 8% year on year, basically in line with expectations; adjusted operating profit of 58.4 billion yuan, up 27% year on year; adjusted net profit of 57.3 billion yuan, up 53% year on year, surpassing Bloomberg's agreed expectations (48.7 billion yuan); free cash flow of 40.4 billion yuan, up 35% year on year. The main business as a whole met expectations; the reasons why net profit greatly exceeded expectations include the impact of one-time taxes and joint venture contributions (according to the company's financial report, the equity of joint ventures after Q2 was 9.9 billion yuan; 13.1/5.5 billion yuan for the full year of '23 and 24Q1, respectively; Pinduoduo, Kuaishou, Epic, etc. contributed more positively).
Key points of investment:
As of 7.12, Tencent has repurchased HK$61.4 billion this year (according to Wind); the competitive landscape among internet companies is good and growth certainty is high (gaming trends are rising, video channel traffic continues to grow, and e-commerce is starting to gain strength outside of advertising); it also has AI and globalization options for a long time.
Domestic games surpassed expectations in Q2, and there is still strong certainty about subsequent growth. According to the company's financial report, overseas game revenue increased 9% year-on-year at a fixed exchange rate, in line with expectations; “Brawl in the Wilderness” Q2 sales increased more than 10-fold year over year, and the long-term delay period for 1H24 increased by more than 40% to 4.8 billion yuan from the end of 23, which is a solid guarantee for the subsequent growth rate of overseas games. Domestic game revenue increased 9% year over year, exceeding expectations. Q2 sales for the flagship products “Wang Zhe Rongyao” and “Peace Elite” resumed year-on-year growth. “Crossing the Line of Fire”, “Battle of the Golden Shovel”, and “Breaking Through the Dark Zone” all brought increases; “DNFM”'s first-month turnover exceeded expectations. Q2 was insufficient, and Q3 will perform even stronger. Combined with deferred estimates, Q2 game traffic volume increased 10-15% year over year.
The social network slightly exceeded expectations. Q2 increased 2% year over year, and the growth rate changed to positive. The growth came from mini-games, music, and long videos; live streaming is still declining.
Ad Q2 exceeded expectations and is resilient but requires attention to macro impacts. According to the company's earnings report, Q2 ad revenue increased 19% year over year.
Video advertising continues to be strong, and is still mainly driven by user traffic growth; AI helps upgrade advertising technology platforms to achieve more accurate advertising; in addition, Q2 long video ads are also contributing. Tencent advertising is still quite resilient, but the growth rate is expected to decline in the second half of the year due to macro+ base influence.
Fintech business expectations for Q2 are low, and subsequent growth may still be under pressure; corporate services are growing steadily. According to the company's financial report, Q2 fintech and corporate services revenue increased 4% year over year, and the growth rate continued to decline from month to month. Mainly dragged down by the financial business, revenue growth slowed to a low single digit, commercial payments continued to slow due to macroeconomic influence. Consumer loan revenue declined due to a decline in risk control, but the double-digit year-on-year increase in wealth management revenue. Enterprise service revenue increased by more than 10% year-on-year, and cloud business revenue and video channel technical service fees are all growing.
There is still room for growth in gross margins. According to the company's financial report, the overall gross profit margin for Q2 was 53.3%, an increase over the same period last year, and a record high.
The gross margin of core businesses increased year-on-month. FBS gross margin has continued to increase month-on-month since 22Q4, reaching 47.6% in Q2.
Maintain a buy rating. Taking into account the contributions of joint ventures, we raised our 24-26 adjusted net profit forecast to RMB 214.9/246.7/281 billion (the original forecast was RMB 206/242.2/277.8 billion). Considering that the macro impact will be reflected, we lowered our target market value from RMB 4526.6 billion to RMB 4285.4 billion, corresponding to the target price of HK$504, and maintained a buying rating based on a 35% increase.
Risk warning: Macroeconomic recovery falls short of expectations, and changes in game regulation.