According to the Smart Finance app, Guosheng Securities released a research report stating that Tencent (00700) maintains a "buy" rating, predicting that the company's revenue for 2024-2026 will be 660.6/707.6/755.4 billion yuan, with a year-on-year growth rate of 8%/7%/7%. Non-GAAP net income will be 221.2/242.9/263.1 billion yuan, with a year-on-year growth rate of 40%/10%/8%. Based on a 10x/20x 2025e P/E for added value services/advertising, and a 4x/2x 2025e P/S for financial and other businesses, it is believed that the reasonable target price is HKD $480.

Zhongsheng Securities' main points are as follows:

High-quality growth, profits exceeded expectations.

Tencent achieved revenue of 161.1 billion yuan in Q2 2024, up 8% YoY. Among them, value-added services, financial enterprise services, and advertising were 78.8/50.4/29.9 billion yuan, up 6%/+4%/+19% YoY, respectively. Q2 2024 gross profit margin was 53%, up 5.8pct YoY. This was mainly driven by high-profit income 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 expense side, sales expenses and administrative expenses were 6%/17%, respectively, up 0.11/+0.03pct YoY. On the profit side, the Q2 adjusted net profit attributable to shareholders was 57.3 billion yuan, up 53% YoY.

Games: Evergreen games continue to improve, with high retention rates for new game users.

The company's international market game revenue was 13.9 billion yuan in Q2 2024, up 9% YoY (excluding exchange rate fluctuations) due to growth in users and revenue from Supercell and PUBG MOBILE. Domestic market game revenue was 34.6 billion yuan, up 9% YoY, partly due to the good market performance of Dungeon and Fighter: Origins. Social network revenue was 30.3 billion yuan, up 2% YoY, mainly due to increases in music and video subscriptions, mini-game platform service fees, and application-based game item sales, partially offset by declines in music and game-related live streaming services. The gross profit margin for value-added services in Q2 2024 reached 57%, up 3pct YoY.

Subsequent game business will continue to accelerate, and the bank expects that it will increase to low double-digit growth in the third quarter, mainly from 1) existing games: Peace Elite's second-quarter revenue increased by a two-digit percentage YoY, and daily active users also resumed YoY growth in July. King of Glory also resumed growth in the second quarter, mainly due to the increase in high-value virtual items and content. 2) New games: Due to its PC operating experience in the past 16 years, DNF mobile game has a sufficient user base, and its user retention rate after release has been impressive. It is expected that DNF mobile game will become another evergreen game.

Advertising: Revenue is still affected by demand-side factors, but gross profit margin has increased significantly.

Q2 2024 online advertising revenue was 29.9 billion yuan, up 19% YoY, and the advertising gross profit margin was 56%, up 6.7pct YoY. Revenue growth was mainly driven by an overall increase in advertising spending. In the medium and long term, although overall advertising demand is still in a weak cycle, the bank expects that advertising will still maintain double-digit growth as advertising supply increases and AI technologies improve recommendation accuracy and conversion rates.

Fintech and cloud: Steady growth in financial enterprise services.

In Q2 2024, financial technology and enterprise services revenue was 50.4 billion yuan, up 4% YoY, and gross profit margin was 48%, compared to only 38% YoY. Among them, financial technology service revenue increased by a low single-digit percentage, and although the number of transactions continues to increase, the value of each transaction has declined. Enterprise service revenue still grew by two digits, mainly driven by cloud services and e-commerce.

AI applications are accelerating through empowerment.

AI technology has achieved good results in content recommendation, video recommendation, and advertising delivery. In advertising delivery, AI is used to further improve the accuracy of user profiling, thereby achieving higher recommendation accuracy and conversion rates, and increasing revenue per unit of advertising. In addition, in terms of large models, YUANBAO allows users to interact with the model in multiple ways and has received positive user feedback. It is expected that it will be further promoted in the future as model capabilities improve.

Risk warning: WeChat merchant and creator operations are weaker than expected, advertiser demand is weaker than expected, changes in government policies on gaming and financial regulation, and risks associated with assumptions and estimates.