Description of the event

Tencent 24Q3 achieved revenue of 167.2 billion yuan, +8% YoY, +4% month-on-month; operating profit of 53.3 billion yuan, +20% YoY and +5% month-on-month; Non-IFRS net profit of 59.8 billion yuan to mother, +33% YoY and +4% month-on-month.

Incident comments

Evergreen Gaming's steady performance compounded the growth of new games, driving both domestic and overseas game revenue growth in Q3. 1) Domestic Q3 “Wang Zhe Rongyao” and “Peace Elite” achieved a year-on-year increase in sales volume. “Naruto” and “Fearless Contract” reached a record high of DAU per season. Evergreen Gaming's steady performance combined with “DNF Mobile Game” increased Q3's domestic game revenue by 14% to 37.3 billion.

2) The launch of the console version of “VALORANT” overseas drove Q3 turnover of more than 30%. “PUBG” and “Brawl in the Wild” also performed strongly, driving Q3 overseas game revenue +9% to 14.5 billion (+11% at a fixed exchange rate). The delay cycle for some games has been lengthened due to increased retention rates, and the revenue growth rate has continued to be significantly higher than the revenue growth rate for many quarters, and will continue to release performance in the future. 3) Popular animation and series content driven the Q3 Tencent Video paid membership ratio +6% to 0.116 billion, and the number of paid Tencent Music members was +16% to 0.119 billion, but the live streaming related business still declined. Combined with the small game platform service fees, the Q3 social network revenue was +4% to 30.9 billion. AI continues to be empowered, and advertising growth is still strong. 1) WeChat stores help merchants effectively reach customers and promote sales conversion. With the help of a large language model, WeChat Search achieves an increase in the relevance of search results, driving the growth of its commercial search volume and click rate. The strong demand from advertisers for video accounts, mini-programs, and search was compounded by the growth in brand advertising driven by the Paris Olympics. Q3 marketing service revenue was +16.6% to 30 billion, and there was also a slight increase over the previous month. 2) Advertising expenses in the gaming and e-commerce industries increased year-on-year, while advertising expenses in the real estate and food and beverage industries were reduced. Mini-program transactions have increased by double digits, and consumer spending is putting pressure on the growth of Jinke's business. Payment service revenue declined due to weak consumer spending. Combined with a slight increase in revenue from financial management services, Q3's revenue was stable year over year; Q3 transaction volume for applets exceeded 2 percent (more than +10% year over year), and growth in cloud services and merchant technical service fees drove Q3 enterprise service revenue to still grow year on year. Under the combined influence, Q3 FinTech and Enterprise Services revenue was +2.0% to 53.1 billion.

Profit growth continued to surpass revenue growth in the 9th quarter, profitability remained strong, and income tax partly affected performance. Mouri end:

The gross margin continued to be high, and the gross margin of the advertising business declined slightly from month to month due to content costs. Tencent's Q3 gross margin was 53.1% (+3.6 pct year over year, -0.2 pct month over month), including value-added services (57.5%, +1.9 pct year over year), marketing services (53.0%, +0.7 pct year over year), fintech and corporate services (47.8%, +6.9pct year over year), and gross margin increased year over year. However, due to the increase in content costs, especially those related to the Olympics, the gross margin of the marketing business declined month-on-month. Expenses and profit side: ① Due to the launch of new products, etc., Q3 sales expenses were +19%, and sales expenses increased slightly year-on-year; ② increased R&D expenses and employee costs (performance rewards for overseas subsidiaries), and Q3 general and administrative expenses were +11%; ③ due to improved business performance of some joint ventures, the non-IFRS level accounted for 8.5 billion of associated companies' profits (4.8 billion in 23Q3). In addition, the high estimated income tax provision base in the same period of 23 led to 19% to 24Q3 tax expenses compared to 19% compared to the same period 8.9 billion.

WeChat's ecological value continues to show, profit margins are expected to remain high, and AI is progressing positively. 1) The combined MAU of WeChat and WeChat increased to 1.382 billion in Q3. Tencent has upgraded its trading platform strategy around WeChat stores. Relying on the entire WeChat ecosystem to create a unified and trustworthy trading experience, it is expected to open up new WeChat e-commerce volume. 2) Due to the steady performance of long-term games and the long-term potential of new games, revenue sources combined with high quality and high gross profit are expected to continue to grow, and the company's profitability is expected to remain steady. 3) Tencent continues to deploy AI in products and operations such as marketing services and cloud services. Compared with the previous model Tencent Hybrid Pro, Tencent Hybrid Turbo increases training and reasoning efficiency by 1 times while reducing inference costs by half.

Risk warning

1. Risk that product version approval, launch progress and flow performance fall short of expectations; 2. Industry regulatory risks.