This report reviews Tencent's product and business structure changes in the past 20 years in the face of multiple waves of technology. The purpose is to analyze the changes in the product cycle behind the company's performance growth under multiple rounds of industrial transformation, explore the challenges and opportunities behind the giant's growth path, and form a reference for the company's subsequent investment value judgment in the new wave of AI.

Phase 1: Exploring Internet profit models in the PC era from 1998 to 2009. In November 1998, five founders including Ma Huateng and Zhang Zhidong established Shenzhen Tencent Computer Systems Co., Ltd., launched OICQ in February 1999, and the number of registered users exceeded one million in November of the same year. In the process of exploring business models, Tencent experimented with telecom value-added services, virtual product sales, and the three “Freemium” models, starting the path of “traffic monetization.” In 2005, the revenue share of Tencent's Internet value-added services surpassed that of wireless value-added services for the first time. Virtual product sales and the “Freemium” model brought Tencent's development into a virtuous cycle, while expanding its business into portals, blogs, and games.

Second stage: 2010-2017, a period of rapid growth under the mobile internet wave. With the birth and spread of smart phones, the PC Internet began to shift to the mobile Internet, and the mobile Internet entered a period of rapid growth. At this stage, Tencent began to gradually advance mobile development for various products. In 2011, the epoch-making instant messaging software “WeChat” was officially released. At the same time, with the advent of the mobile era, Tencent began entering the mobile game field. In 2011, Tencent launched mobile games with a mobile game platform layout, and launched the self-developed MOBA mobile game “Wang Zhe Rongyao” in 2015, laying a solid foundation for the success of today's Evergreen games. At this stage, the company also integrated resources from various parties to launch Tencent Video and Tencent Music to fully expand its business footprint.

The third stage: the beginning of 2018-2021, transition from the consumer Internet to the industrial Internet era. In September 2018, in order to cope with the declining demographic dividend of mobile internet, Tencent launched a strategic upgrade, proposed a policy of “taking root in the consumer Internet and embracing the industrial Internet”, entering the industrial Internet to provide solutions for the digital transformation of various industries. Its products include enterprise-level applications such as Tencent Cloud, Tencent Conference, Enterprise WeChat, Tencent Documents, etc., and collaborated with more than 10,000 enterprises to create more than 400 industry solutions. At the same time, fintech has become Tencent's new strategic business.

Phase 4: From the beginning of '21 to the present, starting the AI commercialization journey from digitalization to intelligence. In the post-dividend era, short video traffic grew rapidly. Faced with competitive inventory challenges, Tencent officially launched a video account in January '20. In 2020, the video account opened up various entrances within the WeChat ecosystem and was interconnected with applets. With the improvement of infrastructure, the video account gradually integrated into the WeChat ecosystem, laying the foundation for subsequent function expansion; since then, entering the AI+ era, the B-side and C-side applications of the big model expanded rapidly. In September 2023, Tencent launched a hybrid model, and launched two products based on mixed elements in May 2024: Tencent Yuanbao and Tencent Elements, and actively promoted the application of AI technology in core business sectors such as games and advertising.

Maintain a “Highly Recommended” investment rating. The company's main business is steady, and the basic social exchange market is stable. The changes in the company's product cycle in many rounds of industrial transformation in the past fully reflect its strong product incubation capabilities and strategic capabilities. We believe that in the AI era, full attention should be paid to the company's potential in applied R&D and commercialization, and continue to be optimistic about the company's profitability. We expect the company's revenue to reach 661.3, 715.2, and 764.9 billion yuan in 2024-2026, and adjusted net profit of 218.4, 244.6, and 268.5 billion yuan, corresponding to PE of 17.3, 15.4, and 14.1x, respectively, maintaining a “highly recommended” rating.

Risk warning: Internet industry regulatory risks, risks of increased competition in the game industry, potential risks of poor macroeconomics to advertising business, intense competition in the cloud computing industry, risks that drag down profitability, etc.