Local/overseas mobile game traffic continues to grow rapidly. 1) Mainland: Revenue increased 29% year-on-year in the 3rd quarter of 2024 (Sensor Tower/Qimai), compared with 32% in the 2nd quarter. It still mainly benefited from the incremental contribution of the new game “Dungeons and Warriors: Origins” (“mDnF”). 2) Overseas: Revenue increased 27% year over year in the 3rd quarter (33%/47% compared to 1/2 quarter). Still driven by Supercell's “Wild Battle”, monthly turnover remained high at 0.6-0.8 billion yuan (RMB, same below).

Game revenue is estimated to increase 11% year over year in the 3rd quarter, which is largely in line with previous expectations. 1) Based on the above turnover data, considering the continued incremental revenue contribution of the new game “mDnF” and the impact of 6-12 months of amortization, we expect that in the 3rd quarter, local mobile game revenue may increase 15% year-on-year, accelerating from 10% growth in the first half of the year. Overseas mobile game revenue is expected to increase 18% year-on-year in the 3rd quarter, and the positive impact of “Brawl in the Wild” will continue until the beginning of 2025, but the degree of impact will gradually decrease; 2) On the mobile game side, the popularity of “Daredevil Contract” will rise or partially make up for the impact of the high base of “DNF”, and the revenue decline is expected to narrow to 1% in the 3rd quarter.

Advertising maintained an industry-leading growth trend: we slightly lowered Tencent's third-quarter ad revenue growth rate to 16% (originally 19%). The main considerations were: 1) advertisers' budget adjustments; 2) Tencent's video content popularity fell short of previous expectations or affected advertising revenue. Based on potential opportunities to increase traffic/ad load rates and the release of intelligent product upgrades, we continue to be optimistic about the long-term growth potential of WeChat ecosystem advertising. It is expected that Tencent's advertising revenue will remain faster than the industry's growth rate.

Fintech: Based on offline consumption trends, we expect payment revenue to increase 1% year-on-year in the 3rd quarter, which is basically the same as the growth rate in the 2nd quarter. Taobao will contribute incrementally or gradually. The cloud business will continue to balance healthy revenue and gross profit growth.

Outlook and valuation: Considering continued cost control and the release of operating leverage, Tencent is expected to maintain a profit growth rate faster than revenue growth. We will basically maintain the 2024/25 net profit forecast, adjust the valuation to 2025, and raise the target price to HK$513 (originally HK$486) according to a 20-fold price-earnings ratio, with room for a 17% increase from the current price.