Incident: Tencent Holdings announced 24Q2 results. In 24Q2, the company achieved operating income of 161.117 billion yuan, an increase of 8% year on year; realized net profit to mother of 47.63 billion yuan, an increase of 82% year on year; achieved adjusted net profit of 57.313 billion yuan, up 53% year on year, exceeding market expectations. In the six months ended June 30, 2024, the company spent a total of approximately HK$52.3 billion (before expenses) to repurchase and cancel approximately 0.155 billion shares.
Driven by the iteration of Evergreen Games and the launch of new games, the company's game business returned to growth. Tencent's 24Q2 local and international game performance was strong, achieving revenue of 48.5 billion yuan, an increase of 9% over the previous year. On the domestic side (1) after the launch of the new game “Dungeons and Warriors: Origins” in May of this year, the iOS bestseller rankings remained high; (2) the evergreen games “King's Glory” and “Peace Elite” achieved year-on-year improvements in 24Q2. Furthermore, “Peace Elite” introduced a “subway escape” gameplay, which is optimistic that it will drive the growth of the game DAU and turnover. Overseas, Supercell's games have performed well. Among them, “Brawl in the Wilderness” reached a record high of 24Q2 DAU by adding random mechanisms, launching new weekly events and monthly card systems, etc.; “Burst Squad” was officially launched globally on May 29, topping the free list in 95 regions, and reached 30 million downloads in the first week after launch. 24Q2 was affected by the game distribution delay cycle, and game revenue in the local and international markets was higher than the revenue growth rate. We expect that Tencent's gaming business revenue growth will continue to accelerate quarter by quarter, driven by the iterations of Evergreen Gaming and the launch of new games.
The impact of a high base is compounded by macroeconomic pressure, and the growth rate of advertising revenue has slowed down. The company achieved advertising revenue of 29.9 billion yuan in 24Q2, a year-on-year increase of 19%. The growth rate decreased by 7 pcts compared to 24Q1. It was mainly driven by revenue growth from video accounts and long videos, and partly offset by the decline in mobile advertising network revenue due to the reduction in advertising budgets of Internet service companies. In addition, benefiting from the continued increase in the share of advertising revenue from video channels, the gross margin of the advertising business also continued to rise. The gross margin of the 24Q2 advertising business was 56%, up 7/1 pct month-on-month respectively. In terms of advertising products, Tencent Video's “Global Connect” service was officially launched in May '24, expanding the customer acquisition channel for live video channels to Tencent's global traffic, helping to improve e-commerce advertisers' customer acquisition efficiency, thereby further increasing advertisers' budgets.
Affected by the macro environment, the growth of fintech and corporate services is under pressure. The company's 24Q2 fintech and corporate services achieved revenue of 50.4 billion yuan, an increase of 4% year over year; gross margin was 48%, up 10/2 pct month-on-month respectively. Affected by the macro environment, overall offline consumer activity in 24Q2 was pressured, causing the company's fintech business to achieve a low single-digit growth rate; in terms of corporate services, video live e-commerce was integrated into the WeChat open platform team to help the WeChat video live e-commerce business better integrate into the WeChat ecosystem, accelerate the pace of commercialization, and achieve double-digit year-on-year growth in the company's corporate service revenue. Looking ahead, we expect the growth rate of the company's fintech and corporate services revenue to rise steadily as the macro environment improves and the video channel GMV grows steadily.
Investment advice: The company's high-margin businesses, such as mini-program games, video ads, and technical service fees, have increased their revenue ratio and continued to improve the company's profitability. Furthermore, the company has continued to strengthen shareholder returns in recent years, which is also attractive. We expect the company to achieve revenue of 669.4/729.3/788.9 billion yuan in 2024-2026; net profit to mother of 177.3/205.5/229.6 billion yuan; EPS 19.02/22.05/24.63 yuan; corresponding PE is 18.1/15.6/14.0 times, respectively, maintaining a “buy” rating.
Risk warning: Gaming policy risks; game traffic falls short of expectations; macroeconomic recovery falls short of expectations; video channel development falls short of expectations.