According to the Smart Finance APP, Minsheng Securities released a research report stating that it maintains a 'buy' rating on Tencent Holdings (00700), expecting the company's revenue in 2024/2025/2026 to be 659.1/715.4/773 billion yuan, with Non-IFRS net income attributable to the parent company at 214.6/240.4/260 billion yuan. Based on the closing price on November 7, 2024, the corresponding adjusted PE ratios are 17X/15X/14X.

The main points of the Minsheng Securities report are as follows:

The industry is entering a phase of normalized supervision, and market sentiment is clearly improving.

1) From a policy perspective, stability is trending: The State Council's 'Opinions on Promoting High-Quality Development of Service Consumption' explicitly identifies online games as an important part of enhancing the quality of cultural and entertainment consumption. The supply of publication licenses has significantly improved. As of the end of October, the National Press and Publication Administration had issued a total of 1072 domestic game publication licenses and 90 imported game publication licenses, with issuance frequency and quantity both higher than in recent years. Driven by new products, the actual sales revenue of the Chinese game market in Q3 2024 hit a historical high (91.77 billion yuan), an 8.9% year-on-year increase.

2) The bargaining power of high-quality content continues to rise: The current distribution model of the gaming industry is relatively mature in terms of joint operations and purchasing traffic. Leading game developers, especially the major companies, are actively innovating content marketing methods to optimize customer acquisition efficiency and extend the lifespan of games. In terms of channel revenue sharing, the split ratio for domestic Android channels is significantly higher than that of Apple and other mainstream global app stores. Uploading on emerging vertical channels and guiding downloads to official servers has become a key focus for CP-side operations and publicity. 'MDnF' became Tencent's first game not to be listed on the official Android app store. We predict that as the demand for high-quality premium games from user groups continues to grow in the future, the mutual selection between supply and demand sides will become tighter, and game developers are expected to accelerate breaking free from channel constraints or reduce channel revenue sharing ratios.

3) The global mobile gaming market is entering a new round of growth, with the overseas competition remaining heated: According to estimates by Sensor Tower, global mobile game revenue is expected to rebound to $83 billion in 2024, with growth significantly faster than other segmented markets such as PC and consoles. In terms of categories, leisure games have become the core growth point in the large cap of the mobile gaming market. Enhancing competitiveness in overseas markets is the strategic transformation direction for many domestic game developers at present, with different levels of players having different paths for overseas expansion.

Tencent's local Evergreen games performed well, with steady growth in overseas expansion.

1) Local Evergreen game revenue rebounded, with a significant increase in income contribution from "MDnF": From the product matrix perspective, Tencent's absolute leading position in the domestic gaming market is increasingly stable, with an increase in the number of top products. "Fearless Contract" on the PC platform performed well, flagship games "Honor of Kings" and "Peace Elite" accelerated gameplay updates, and revenue increased significantly month-on-month; old games like "Dungeon & Heroes" still have growth potential; new game "MDnF" is expected to contribute significantly to incremental revenue in the second half of 2024. Focus on local game reserves: "Daybreak of the Stars", "Pokemon Great Assembly", "One Piece: Ambitious Adventure", "Fearless Contract: Source Action", "Exploding Squad", etc.

2) Level Infinite's global distribution capabilities are expanding, while Supercell shows growth potential again: Tencent's investment and acquisition of overseas studios are driving global expansion, accelerating the establishment of international business brands in recent years. Looking at the overseas revenue landscape in Q3, the popularity of "PUBGM" is rising, and as of the end of October, "Brawl Stars" still ranks in the top ten in the best-selling games charts in 58 countries and regions. Considering the longer overseas revenue recognition cycle, Tencent is expected to continue benefiting from stable revenue growth from Supercell. Subsequent focus on the launch dates of games such as "Assassin's Creed: Code Jade", "Path of Exile 2", "Dune: Awakening", "Exoborne".

Risk warning: 1) Tightening of gaming industry policies; 2) New game revenue falling short of expectations, old game user attrition; 3) Slowdown in large cap growth driven by live streaming e-commerce; 4) Slowdown in advertiser spending intentions.