Matters:
2Q24 operating results: Revenue is in line with expectations, and profit far exceeds expectations. 2Q24 achieved revenue of 161.1 billion yuan, YOY +8%, in line with Bloomberg's agreed expectations; achieved gross profit of 85.9 billion yuan, YOY +21%, GPM 53.3% (52.6% in the previous quarter, 47.5% in the same period last year); achieved non-IFRS net profit of 57.3 billion yuan, YOY +53%, which greatly exceeded Bloomberg's agreed expectations. Looking at the detailed breakdown, the operating profit level is basically in line with expectations under IFRS. More equity incentives caused NON-IFRS adjusted operating profit to exceed expectations by 7%. Furthermore, the release of profits from joint ventures, high income tax base, and quarterly fluctuations made up the main remaining portion of NON-IFRS net profit to mother, which greatly exceeded expectations.
Commentary:
Overseas games: Supercell's drive to revenue growth is beginning to show. Driven by “PUBGM” and “Wild Brawl”, revenue of 13.9 billion yuan and YOY +9% (Q1 was 3%) this quarter. The turnover growth rate was significantly higher than the revenue growth rate. It is expected to be mainly affected by Supercell's long deferral cycle, so there may still be room for revenue to be released later. In addition, the financial report revealed operating data for Supercell's core product “Wilderness Brawl”:
DAU reached a record high, and the world entered the TOP3, and the turnover increased more than tenfold over the same period last year.
Domestic games: The basic market crossed the low point, and DNFM contributed to an increase in turnover. The quarter achieved revenue of 34.6 billion yuan, YOY +9%, mainly due to incremental contributions from “Dungeons and Warriors: Origins” and “Fearless Contract”; the revenue growth rate is also greater than the revenue growth rate. It is expected to mainly come from delays in “Dungeons and Warriors: Origins”, so there may be room for revenue to be released later. We believe that the basic version of domestic games has passed the low point. “Wang Zhe Rongyao” and “Peace Elite” Q2 sales have resumed year-on-year growth, and the “Naruto Mobile Game” DAU has reached the 1000w milestone. Furthermore, the minigame turnover is +30%, which still maintains a high level of popularity.
Looking ahead, the summer basic market maintains good performance, and new travel flows are expected to continue to be converted into revenue contributions. On the one hand, the growth rate of domestic and overseas game sales is greater than the revenue growth rate, and the delay is expected to support revenue growth in subsequent quarters; on the other hand, during the summer, “Wang Zhe Rongyao” will launch the “10v10 model”, and “Peace Elite” will launch a “subway escape” and “stimulating battlefield” mode, which is expected to drive the growth of users and traffic data; mid-waist products such as “Battle of the Golden Shovel”, “League of Legends Mobile Game”, and “Cross Fire Mobile Games” have maintained steady performance.
In addition, the company's pipeline stocks products such as “Operation Delta” (scheduled for September) and “Wang Zhe Rongyao: Breaking Stars” (July unabridged test).
Social networks: Driven by audio and video content, live streaming has further stabilized. The quarter achieved revenue of 30.3 billion yuan, YOY +2%, and QOQ -1%. Tencent Video launched a number of popular TV series this quarter, such as “Celebrating the Years 2” and “With Fengxing” (all using Reading IP and produced by Xinli Media), driving the number of paid members YOY +13% to 0.12 billion. Looking ahead, the live streaming business distributed by Tencent Music, Huya Live, etc. is already relatively stable month-on-month. It is expected that with subsequent base adjustments, the overall revenue growth rate of the social networking business is expected to rise in stages.
Online advertising: The WeChat system drives revenue growth, and gross margin continues to be optimized. The quarter achieved revenue of 29.9 billion yuan, YOY +19%, mainly driven by the growth in video and long video advertising revenue; ad networks declined due to the contraction of the online service industry's budget. Furthermore, with the upgrade of the advertising technology platform and the improvement of matching efficiency, the gross profit margin of 56%, QoQ+1pct was achieved, and optimization continued. Driven by content, video channel length increased significantly year over year; applet user participation continued to increase, total time YOY +20% or more, and GMV achieved double-digit growth.
Fintech and corporate services: Fintech is affected by macroeconomic fluctuations, and cloud and enterprise services have achieved steady growth. Revenue for the quarter was $50.4 billion, YOY +4%. Among them: 1) The revenue growth rate of the fintech business has slowed to a low single digit. The slowdown in payments reflects weak consumption. Subjectively implementing risk management and increasing the scale of control has led to a decline in revenue from consumer loan services, and “savings” in financial management have achieved double-digit growth. 2) Cloud and enterprise services YOY +10% or more, mainly contributed by cloud services, live video e-commerce, and enterprise WeChat.
Profit forecast and investment advice: Considering that the growth rate of the fintech business is slowing faster than our expectations and overall profit exceeds our expectations, adjust the 24-26 revenue forecast to 665.5/725.7/784 billion yuan (original forecast was 670.6/732.9/792.9 billion yuan), YOY +9%/8%; NON-IFRS net profit forecast to mother to 219.7/246.4/274.2 billion yuan (original forecast was 210.1/234.9/ 258.9 billion yuan), YOY +39%/12%/11%; NON-IFRS EPS 23.94/27.55/31.44 yuan, YOY +44%/15%/14%. We believe that the competitive pattern of Tencent's core business is rising steadily, with abundant and stable cash flow, and shareholder returns through dividends and repurchases. Looking ahead to the next few quarters, game business revenue is expected to grow at an accelerated pace on the basis of deferred confirmation and steady performance of basic platforms; video channels continue to increase the level of commercialization and increase in applet user participation are expected to support the advertising business to grow faster than the industry. The company was given a target valuation level of 24-year NON-IFRS EPS 18-20xPE, corresponding to a target price of HK$473.63-526.25, maintaining a “recommended” rating.
(The exchange rate is 0.91 RMB/HKD)
Risk warning: macroeconomic fluctuations, performance of new products falling short of expectations, increased industry competition