24Q2's revenue was 161.1 billion (yoy +8%, qoq +1%). The gross margin was 53% (yoy+5.8pp, qoq +0.7pp). Net profit to mother (IFRS) for 24Q2 was 47.6 billion (yoy +82%, qoq +14%); net profit to mother (non-IFRS) was 57.3 billion (yoy +53%, qoq +14%).
24Q2 value-added service revenue of 78.8 billion (yoy +6%, qoq +0.2%). Its international market revenue was 13.9 billion (yoy +9%, qoq +2%), thanks to a resurgence in popularity of Supercell's games (particularly “Brawl and the Wild”).
Domestic revenue of 34.6 billion (yoy +9%, qoq +0.3%) is mainly due to contributions from “Fearless Contract” and the new game “Dungeons and Warriors Mobile”. 24H2 We expect the game's growth rate to continue to grow: 1) “Peace Elite” DAU benefited from the new Metro Royale model's return to year-on-year growth in July; 2) “DNF” was launched in mid-late May, contributing to the full quarter of Q3. Combined with Q2 flow delays, it is expected to contribute more to Q3 revenue. 3) Supercell Q2's excellent performance combined with a longer delay period is expected to continue to strengthen overseas Q3 growth. New games: Expect “Operation Delta,” “Path to Exile,” and “One Punch Man” to contribute more when launched. Social networking revenue was 30.3 billion yuan (yoy +2%, qoq -0.7%). The increase was mainly due to video and music subscriptions. The increase in sales revenue from mini-game platform service fees and app game items was partially offset by the decline in live streaming service revenue.
24Q2 online advertising revenue was 29.9 billion (yoy +20%, qoq +13%). Mainly driven by revenue growth from video accounts and Tencent Video. Due to the reduction in advertising budgets of some internet service companies, the revenue of mobile ad networks declined year over year. We expect the year-on-year growth rate to decline in Q3 as Tencent's video ad revenue returns to normal levels.
24Q2 fintech and corporate services revenue was 50.4 billion yuan (yoy + 4%, qoq -4%). The further slowdown in commercial payment revenue growth reflected a slow increase in consumer spending. At the same time, consumer loan service revenue declined due to improved risk management and control measures, while revenue from financial management services recorded a double-digit percentage increase. The revenue of the enterprise service business achieved a growth rate of more than ten points, benefiting from the increase in revenue from the cloud service business and the increase in technical service fees for video account merchants.
24H2 expects the game growth rate to continue to increase. We expect IFRS net profit to be 188.6/218.4/245.4 billion yuan in 24-26 (the original value was 170.8/196.9/226.5 billion yuan in 24-26, with lower sales expenses, and higher than anticipated increase in profit forecasts due to advertising and investment income), and non-IFRS net profit for 24-26 is 229.1/266.5/298.4 billion yuan. Using SOTP valuation, a corresponding target price of HK$422.68 (386.98 RMB HKD/RMB=0.92) was given to maintain the “buy” rating.
Risk warning
Policy risk, risk of game revenue falling short of expectations, competition risk in the advertising industry