Overall performance: Excellent profit performance, market expectations may have room for further improvement
2Q2024's revenue was +8% year over year and +1% month over month, which is generally in line with Bloomberg's expectations. 2Q2024's non-IFRS operating profit was +27% YoY, which was basically the same; non-IFRS net profit was +53% YoY, +14% YoY, which greatly exceeded Bloomberg's estimate of 8.6 billion. Non-IFRS net profit increased by more than 50% year-on-year for 2 consecutive quarters, with 2-year CAGR reaching 40% and 43% respectively.
2Q2024's gross profit was +21% YoY, +2% month-on-month; gross margin was about 53.3%, +5.8pct YoY, +0.7pct month-on-month; the gross margin level was slightly better than Bloomberg's expectations. The company's management said at the performance meeting that it is expected that the shift in the revenue structure to a high-margin business portfolio will continue for many years. Gross profit growth will continue to be faster than revenue growth, but as the marginal effects of efficiency measures weaken, gross profit growth may change from a revenue growth multiplier of more than 2 times to a revenue growth multiplier of 1-2 times.
The 2q2024 non-IFRS net profit growth rate greatly exceeded the operating profit growth rate, partly due to: 1) 2Q2024's non-IFRS share of joint operating profit and loss increased by a net of 6 billion yuan year-on-year, with a net increase of 4.4 billion yuan over the previous year, mainly due to the increase in business performance of several domestic affiliated companies and overseas game studio affiliates. The company's management said at the results meeting that it is expected that in the second half of the year, the share of profit and loss of the joint venture company will increase or decline somewhat year-on-year. 2) 2Q2024 corporate income tax expenses fell 9% year over year, mainly due to the higher base for the same period last year due to deferred income tax adjustments of an overseas subsidiary. The company's management stated at the performance meeting that it is expected that the non-IFRS income tax rate will drop to the 18-20% range for the full year of 2024 (22% in 2023).
In our previous report “Tencent Holdings (0700.HK): DNF Mobile Games performed well, profit expectations entered the upgrade channel” (2024.05.27), we clearly stated that game growth expectations have a favorable impact on gross margin brought about by fixing the superimposed revenue structure, and there is potential for further improvement in market profit expectations. As of 2024/8/16, Bloomberg unanimously predicted that non-IFRS net profit for 2024 would increase by 4% (about 8.8 billion) from before the 2Q24 results, and an increase of about 6% (about 11.5 billion) from the release of our previous report. Looking ahead to the second half of the year, we believe that Tencent's fundamentals will continue to show two major characteristics. Incremental business development will drive higher gross profit growth, and the growth rate of game revenue will continue to rise. Currently, Bloomberg expects that there may still be some room for improvement.
Online gaming: 2Q2024 sales are returning to a high level of growth. We expect revenue growth to continue to rise in the second half of the year. Our previous reports clearly indicate that gaming growth is beginning to accelerate. 2Q2024's online game revenue growth rate has returned to 9% year over year, and its game revenue growth rate in China and overseas has all recovered to 9% year over year. 2Q2024 “Wang Zhe Rongyao” and “Peace Elite” both resumed year-on-year growth. After the launch of “Dungeon and Warrior: Origins”, the iOS game best-selling ranking remained in the top 2 (according to Qimai data), and the overall growth rate of domestic game sales exceeded the revenue growth rate. Overseas, the average daily activity of 2Q2024 “Wilderness Brawl” reached a record high, and the turnover increased more than 10 times over the same period last year. As of 2Q2024, the company's current debt-deferred revenue balance was +15% year-on-year. We expect to gradually confirm that the company's game revenue growth rate will continue to increase in the second half of the year.
Online advertising: 2Q2024 revenue +19% year over year, advertising business development path may provide growth resilience 2Q2024's advertising revenue +19% year over month, better than Bloomberg's expectations; mainly driven by revenue growth from video accounts and long videos, partly offset by reduced budgets of advertisers in the Internet service industry and falling mobile network advertising revenue.
2Q2024 advertising gross margin was +36% year-on-year, and gross margin continued to rise to 56%. The current strategic direction of the company's advertising business is clear: 1) promoting technological upgrading to drive higher conversion rates; 2) increasing the proportion of closed-loop advertising within the WeChat advertising portfolio; 3) gradually releasing more advertising inventory. We expect the company's advertising business to be more resilient in the face of macro-environmental fluctuations.
FBS: The macro consumption environment led to a short-term decline in fintech service revenue in 2Q2024. The company's fintech and corporate services revenue was +4% year over year and -4% month over month, lower than Bloomberg's expectations. The year-on-year growth rate of fintech service revenue in the second quarter slowed to a low single digit. The further slowdown in the growth rate of commercial payment revenue reflected changes in consumer spending. At the same time, the company strengthened risk management and control measures, leading to a decline in consumer loan revenue. In the second quarter, corporate service revenue achieved a year-on-year growth rate of more than ten points, benefiting from the increase in cloud service revenue (including the increase in commercialization of enterprise WeChat) and the increase in technical service fees for video account merchants.
Investment advice:
The company's high-margin incremental business lays the foundation for a continuous increase in gross margin, and the domestic and overseas game turnover performance implied a month-on-month acceleration in game revenue in the second half of the year. We raised our 2024-2026 forecast non-IFRS net profit to 217.8/251.7/278.6 billion yuan (the original forecast was 209.1/239.6/269.1 billion yuan), with year-on-year growth rates of 38%/16%/11%, respectively.
As of 2024/8/16, the company's stock price corresponding to the 2024/2025/2026 forecast PE was 15x/13x/12x, respectively. The 12-month Bloomberg rolling forecast PE was below 1.4 standard deviations from the 5-year median, at the historical quantile of 8%. Compared to the NASDAQ, Bloomberg's 12-month outlook PE is 1.7 standard deviations below the 5-year median, at the 6% historical quantile, and the valuation is relatively low.
We expect game growth to begin to recover, and repurchases will resume after compounding performance, which will help improve valuation constraints. Maintain the target price of HK$476 and maintain the “buy” rating.
Risk warning: macroeconomic growth is uncertain; there is uncertainty about the launch of the company's new game; the pace of commercialization of AI technology is slower than expected.