Matters:

Tencent Holdings is about to announce its third quarter results.

Guoxin Internet views:

With 2024Q3, we expect Tencent to achieve revenue of 168.4 billion yuan, an increase of 9% year over year. Online advertising is expected to grow steadily in the third quarter. The growth rate of the game business will continue to increase under the influence of delays, and the fintech business will be affected by the macro environment. Let's take a closer look:

① On the gaming side, we expect online games to grow by 13% due to the delayed flow rate. “DNF” mobile game sales declined month-on-month, mainly due to the month-on-month decline in the number of users. As of October 13, “DNF” ranked 67th in the Qimai iOS free game ranking and ranked 2nd in the best-selling games list. We expect the “DNF” mobile game decline will narrow somewhat from month to month with the loss of non-core users. The basic version of the old game is stable. It is expected that “Peace Elite” will grow well after the new version is launched in the summer, and the “Naruto” mobile game's daily activity has broken a record high of 10 million.

② In terms of advertising, advertising revenue is expected to increase 16% year over year. On the one hand, video channel traffic is growing steadily, and more ad slots are being opened one after another. On the other hand, under the influence of the macro environment and Tencent's video schedule, brand advertising and affiliate advertising revenue declined sequentially. In the third quarter, we observed: 1) WeChat stores activated global traffic, which is expected to accelerate video accounts; 2) Taobao and WeChat started interconnection, and Taobao merchants increased their advertising CTR within the WeChat ecosystem, which is expected to lead to an increase in advertising. 3) AI-enabled advertising: Since July, the Tencent advertising 3.0 system has been launched, and we expect an increase of about 5-10% in terms of CTR.

③ Revenue from fintech and corporate services is expected to increase 3% year-on-year, and the payment business is mainly affected by the macro environment.

2024Q3 is expected to achieve non-IFRS net profit of 55.5 billion yuan, a year-on-year increase of 24%; non-IFRS downgraded net profit margin of 33%.

Investment advice: On the revenue side, the company's advertising business and fintech business are affected at the macro level. However, the release of inventory and technological upgrades in the company's advertising business are expected to bring resilience to advertising growth. The payment business, which accounts for most of the revenue in the fintech business, was affected at the macro level, but high-margin businesses such as financial management grew healthily. In addition to this, the continuous development of video e-commerce has also led to an increase in revenue from e-commerce advertisements and technical service fees. On the profit side, the continued development of the company's high-quality business provides potential for a continuous increase in profits.

Considering the macro impact, profit expectations were lowered slightly. The adjusted net profit for 2024-2026 is expected to be 219.8/248.2/272.9 billion yuan, respectively, a decrease of 1%/1%. Considering that the company's video e-commerce is progressing well, the basic game market has rebounded slightly, and the target price was raised. 16-18xPE was given for 25 years, with a target price of 471-528 HKD. Continue to maintain the “better than the market” rating.

Commentary:

Revenue is expected to increase 9% in the third quarter, and adjusted net profit to mother will increase by 24% 2024Q3. We expect Tencent to achieve revenue of 168.4 billion yuan, an increase of 9% over the previous year. Online advertising is expected to grow steadily in the third quarter. The growth rate of the game business will continue to increase under the influence of delays, and the fintech business will be affected by the macro environment. Specifically: ① On the gaming side, under the influence of traffic delays, we expect online games to grow by 13%; ② In terms of advertising, it is expected that video number growth combined with the launch of advertising system 3.0 will drive a 16% year-on-year increase in advertising revenue; ③ fintech and corporate service revenue is expected to increase 3% year over year, and the payment business is mainly affected by the macro environment.

2024Q3 is expected to achieve non-IFRS net profit of 55.5 billion yuan, a year-on-year increase of 24%; non-IFRS downgraded net profit margin of 33%.

Online gaming: steady growth in the third quarter

With 2024Q3, we expect the company's online game business revenue to be 52.1 billion yuan, an increase of 13% over the previous year. The month-on-month increase in growth is mainly due to deferred revenue contributions.

Domestic game revenue is expected to increase 15% year over year. Looking at new games, 1) Domestic companies' key game “DNF” mobile game sales declined month-on-month, mainly due to the month-on-month decline in the number of users. As of October 13, “DNF” ranked 67th in the Qimai iOS free game ranking and ranked 2nd in the best-selling games list. We expect the “DNF” mobile game decline will narrow somewhat from month to month with the loss of non-core users. 2) “Operation Delta”, which launched at the end of September, added 25 million new users in the first week. Looking at old games, the basic game is stable. It is expected that “Peace Elite” will grow quite well after the launch of the new summer version. The “Naruto” mobile game's daily activity has broken a record high of 10 million, “Break Through the Dark Zone” continues to grow steadily, and the number of people online in the “Fearless Contract” national service has stabilized above 1 million.

Overseas growth continues to be good, and the year-on-year increase is expected to increase by 9%. Judging from Qimai's data, Supercell's “Wilderness Brawl” maintained a good momentum in the third quarter, but the number of users dropped slightly compared to 24Q2.

Online advertising: Revenue is expected to increase by 16%, and the advertising 3.0 system will be launched in 2024Q3. We expect Tencent's online advertising revenue to be 29.7 billion yuan, an increase of 16% over the previous year. On the one hand, video channel traffic is growing steadily, and more ad slots are being opened one after another. On the other hand, under the influence of the macro environment and Tencent's video schedule, brand advertising and affiliate advertising revenue declined sequentially.

WeChat stores activate global traffic, which is expected to accelerate video accounts. Starting August 25, Tencent will officially support merchants to upgrade small video account stores to WeChat stores. WeChat Mini Store supports the circulation of store and product information in multiple WeChat scenarios such as public accounts (subscription numbers, service numbers), video accounts (live streaming, short video), applets, and search and search. After the upgrade, WeChat Mini Store will connect traffic from WeChat scenarios such as video accounts, public accounts, applets, and search and search.

Taobao and WeChat have started interconnection. In early September, Taobao plans to add WeChat payment capabilities. In early October, WeChat already supports direct Taobao shopping.

After interconnection, Taobao merchants increased their advertising CTR within the WeChat ecosystem, which is expected to lead to an increase in advertising.

AI-enabled advertising: Since July, the Tencent Advertising 3.0 system has been launched, and we expect an increase of about 5-10% in terms of CTR.

Fintech and corporate services: Revenue side As the macro environment fluctuates in 2024Q3, we expect revenue from fintech and corporate services to be 53.6 billion yuan, an increase of 3% over the previous year. Dismantling Tencent's fintech market, the main revenue comes from payment services, which are related to the offline consumer market. According to the monetary authority balance sheet issued by the central bank, non-financial institution deposits (customer reserve deposits deposited by payment institutions with the central bank) were 1%/-1%, respectively, in July/August. Non-financial institution deposits (average value at the beginning and end of the period) increased 5%/1% year over year in 24Q1/Q2.

Investment advice: maintain an “better than the market” rating

On the revenue side, the company's advertising business and fintech business were affected at the macro level. However, the release of inventory and technological upgrades in the company's advertising business are expected to bring resilience to advertising growth. The payment business, which accounts for most of the revenue in the fintech business, was affected at the macro level, but high-margin businesses such as financial management grew healthily. In addition to this, the continuous development of video e-commerce has also led to an increase in revenue from e-commerce advertisements and technical service fees. On the profit side, the continued development of the company's high-quality business provides potential for a continuous increase in profits.

Considering the macro impact, profit expectations were lowered slightly. The adjusted net profit for 2024-2026 is expected to be 219.8/248.2/272.9 billion yuan, respectively, a decrease of 1%/1%. Considering that the company's video e-commerce is progressing well, the basic game market has rebounded slightly, and the target price was raised. 16-18xPE was given for 25 years, with a target price of 471-528 HKD. Continue to maintain the “better than the market” rating.

Risk warning

Policy risks; the risk of intense competition in the advertising industry; the risk of new games not being launched as scheduled, etc.