High quality growth, profit exceeding expectations. 2024Q2 Tencent achieved revenue of 161.1 billion yuan, yoy +8%. Among them, value-added services, financial enterprise services, and advertising were 78.8/50.4/29.9 billion yuan, yoy +6%/+4%/+19%, respectively. The gross margin for 2024Q2 was 53%, yoy+5.8pct, mainly driven by high-profit revenue sources such as domestic game revenue, video accounts, advertising revenue, mini-games, platform service fees, and e-commerce technical service fees within video accounts, as well as cost saving measures. On the cost side, the 2024Q2 sales expenses rate and administrative expenses rate were 6%/17%, yoy+0.11/+0.03pct, respectively. On the profit side, Q2 adjusted net profit to mother was 57.3 billion yuan, yoy +53%.
Gaming: Evergreen Gaming continues to improve, and the retention rate of new game users is high. The company's 2024Q2 international market game revenue was 13.9 billion yuan, yoy +9% (year-on-year stability after excluding exchange rate fluctuations), benefiting from the growth in users and turnover of Supercell's games and “PUBG MOBILE”. The game's revenue in the local market was 34.6 billion yuan, yoy +9%, partly benefiting from the good market performance of “Dungeons and Warriors: Origins”. Social networking revenue of 30.3 billion yuan, yoy +2%, was mainly driven by an increase in sales revenue from music and video subscriptions, mini-game platform service fees, and app-based game items, partially offset by a decline in revenue from music and game-related live streaming services. The gross margin of value-added services reached 57% in 2024Q2, yoy+3pct.
The subsequent game business will continue to accelerate. We expect it to increase to low double-digit growth in the 3rd quarter, mainly due to 1) Existing games: “Peace Elite”'s revenue increased by double digits year on year in the second quarter, and daily active users also resumed year-on-year growth in July. “Wang Zhe Rongyao” also resumed growth in the second quarter, mainly benefiting from high-value virtual items and content improvements. 2) New games: Since DNF mobile games have 16 years of experience in PC operation, they have a sufficient PC user base, and the user retention rate after release is impressive. It is expected that DNF mobile games will become another evergreen game.
Advertisement: Revenue is still being affected by the demand side, and gross margin has increased dramatically. The 2024Q2 online advertising business revenue was 29.9 billion yuan, yoy +19%; advertising gross profit margin was 56%, yoy +6.7pct. Revenue growth was mainly driven by an increase in overall ad spend. In the medium to long term, although overall advertising demand is still in a weak cycle, we expect ads to maintain double-digit growth as the supply of ads grows and the accuracy and conversion rate of ad recommendations brought about by AI and other technologies improve.
Fintech and cloud: Financial enterprise services are growing steadily. Fintech and corporate services 2024Q2 revenue was 50.4 billion yuan, yoy +4%; gross profit margin was 48%, compared to only 38% in the same period last year. Among them, revenue from fintech services grew by a low number of units. Looking at the breakdown, although the number of transactions continued to grow, the value of each transaction declined. Enterprise service revenue is still growing by double digits, mainly driven by cloud services and e-commerce.
AI applications are empowered to accelerate. AI technology has achieved good results in content recommendations, video recommendations, and advertising. In advertising, the accuracy of user portraits is further improved through AI to obtain higher recommendation accuracy and recommendation conversion rates, thereby increasing the revenue of unit advertisements. Furthermore, in terms of large models, Yuanbao allows users to interact with models in various ways and has received positive user feedback. It is expected to be further promoted in the future as model capabilities improve.
Investment advice: We forecast the company's revenue for 2024-2026 to be 660.6/707.6/755.4 billion yuan, an increase of 8%/7%/7% year-on-year. Non-GAAP net profit was $221.2/242.9/263.1 billion, respectively, up 40%/10%/8% year over year. Based on value-added services/advertising 10x/20x 2025e P/E, financial enterprise services, and other 4x/2x 2025e P/S, we believe a reasonable target price is HK$480, maintaining a “buy” rating.
Risk warning: WeChat merchants and creators' operations are weaker than expected, advertisers' demand is weaker than expected, game industry policy changes, financial policy regulation changes, and risk of errors in assumptions and calculations.