Tencent announced financial results for the 2024Q3 fiscal quarter. Tencent recorded revenue of 167.2 billion yuan in 2024Q3, up 8% year over year. From the perspective of business composition, the company's four major business lines of gaming/social network/fintech and corporate services/advertising each reached RMB 518/30.9/53.1/30 billion this season, up 13%/4%/2%/17% year over year.

The company's adjusted net profit for the quarter was about 59.8 billion yuan, an increase of 33% over the previous year, significantly exceeding Bloomberg's agreed forecast of 54.4 billion yuan. Among them, two non-operating factors had a big impact: 1) the company recorded a profit of 6 billion yuan for associated companies and joint ventures this quarter, a significant increase from 2.1 billion yuan in the same period last year; 2) the effective tax rate corresponding to income tax expenses this quarter was about 14%, a sharp drop from 23% in the same period last year, mainly due to the high base of withholding income tax provisions for the same period last year.

The game is in a strong product cycle. 2024Q3's domestic game revenue also increased 14% to RMB 37.3 billion, mainly benefiting from games such as “Fearless Contract,” “Wang Zhe Rongyao,” “Peace Elite,” and “DNF Mobile Games.” 2024Q3's international game revenue was 14.5 billion yuan, up 9% year over year, mainly benefiting from the strong performance of games such as “PUBG MOBILE” and “Wild Brawl”. The company extended the deferral cycle based on the increase in the retention rate of some games, so the growth rate of international game revenue was much lower than the revenue growth rate. We expect the high increase in international game sales to be reflected in Q4 and next year's revenue.

Fintech and corporate services revenue growth has slowed, and gross margin has increased. According to the company's performance exchange meeting, the number of transactions in the 2024Q3 payment business increased by about 10% year-on-year, but the value of a single transaction declined, causing the payment business to drag down the entire segment. Increased cost efficiency of cloud services and increases in merchant technical service fees and financial management revenue have led to a continuous improvement in the division's gross margin to 48%. In the future, we will continue to observe the effects of consumer boosting policies and Taobao's opening up cooperation on revenue in the payment business.

There is still plenty of room for advertising improvement. 2024Q3's advertising revenue also increased 17% to 30 billion yuan, mainly due to strong demand for video accounts, mini-programs, and WeChat search ads, as well as brand advertising driven by the Olympics. Looking ahead, on the one hand, active consumption promotion policies are expected to help advertising; on the other hand, the company's improvement of infrastructure such as video accounts, search, and WeChat stores is also expected to improve the willingness of merchants to launch. Currently, the video channel ad loading rate is about 3-4%, and there is still plenty of room for improvement.

Increased profit margins are still an important long-term focus. We believe that Tencent's high-margin businesses such as video ads, search ads, e-commerce technical service fees, and enterprise service SaaS are still in the monetization cycle, and the company will maintain efficient investment. Therefore, we are optimistic that Tencent's profit level will continue to rise in the future. We expect the company's 2024-2026 revenue of 657.3/702.3/752 billion, and non-GAAP net profit of about 223.5/243.1/266.2 billion. We gave the company a target price of HK$474, corresponding to the company 16x 2025e P/E, and reaffirmed the “buy” rating.

Risk warning: The pace of game monetization falls short of expectations, the consumer demand environment falls short of expectations, and the WeChat ecosystem's monetization efforts fall short of expectations.