Incidents:
On August 14, 2024, the company announced its 2024Q2 financial report. 2024Q2 achieved revenue of 161.1 billion yuan (yoy +8%, qoq +1%), operating profit of 50.7 billion yuan (yoy +26%, qoq -3.5%), net profit to mother 47.6 billion yuan (yoy +82%, qoq +14%), non-IFRS operating profit of 58.4 billion yuan (yoy +27%, qoq -0.3%), Non- IFRS net profit to mother is $57.3 billion (yoy +53%, qoq +14%).
Our point of view:
1. Operating data: The total number of users of 2024Q2 video accounts increased significantly year-on-year, and the total number of users of applets increased by more than 20% year-on-year. The number of paid members of Tencent Video and Tencent Music both achieved double-digit year-on-year growth.
2. Overall performance: The core business maintained steady growth. The company's overall gross margin in 2024Q2 was significantly optimized year on year, and also increased month-on-month (yoy+5.8pct, qoq+0.7pct); the cost ratio remained stable year on year, and non-IFRS net profit increased strongly by 53% year on year to 57.3 billion yuan, exceeding market expectations.
3. Value-added business: 2024Q2 game revenue grew steadily, with domestic and overseas markets growing 9%/9% respectively; “Wang Zhe Rongyao” and “Peace Elite” resumed growth; the new “DNF” mobile game showed strong online performance. The growth rate of overseas sales was significantly higher than the revenue growth rate, which is expected to be gradually confirmed later; Tencent Video released a number of popular homemade TV series and animation series, driving the number of paid Tencent Video members increased 13% year on year to 0.117 billion; TME music paid members increased 18% year on year to 0.117 billion; TME music paid members increased 18% year on year to 0.117 billion billion; Minigame sales increased by more than 30% year over year.
4. Online advertising business: The 2024Q2 advertising business increased 19% year over year. The growth of WeChat video accounts, long video, and AI-driven advertising technology platform upgrades jointly drove strong advertising business growth, and gross margin continued to increase significantly year over year.
5. Fintech and corporate services: 2024Q2 revenue increased 4% year-on-year, and the macroeconomic environment affected the growth rate of payment business; cloud business growth was steady, AI assistant ingots were launched, and AI search with an enhanced unique content ecosystem had advantages; the contribution of video merchants to technical service fees continued to increase, and the e-commerce transaction ecosystem continued to improve.
6. Continue to strengthen shareholder returns to support stock prices: the company expects the repurchase to exceed HK$100 billion in 2024. According to wind data, since 2022/2023/2024 (as of August 17), Tencent has repurchased HK$33.8 billion/48.4 billion/HK$62.4 billion respectively. The company expects the repurchase scale to increase to over HK$100 billion during the year, compounded by cash dividends, which is expected to provide strong support for the stock price
The profit forecast and investment rating take into account the steady growth of the company's game business, the continuous growth of advertising exceeding expectations, and the significant year-on-year increase in profit margins. We raised our profit expectations. We expect the company's FY2024-2026 revenue to be 665.6/727.7/788.6 billion yuan, respectively, and the NON-IFRS net profit to mother is 223.8/253.9/282.4 billion yuan, corresponding to non-IFRS caliber EPS of 24/27/30 yuan, corresponding to non-IFRS PE, respectively It is 14/13/11X. According to the SOTP valuation method, we gave Tencent Holdings' businesses a total target market value of 3.9 trillion yuan/HK$4.2 trillion in 2024, corresponding to a target price of HK$466, maintaining a “buy” rating.
Risks indicate the risk of slowing down in the growth rate of active users, risk of new game approval process, risk of video content supervision, risk of rapid increase in content costs, risk of rapid increase in channel costs, risk of competition risk, antitrust risk, risk of financial policy changes, investment risk, risk of valuation adjustments, and expansion of video accounts and WeChat games falling short of expectations.