Overall performance: 3Q24 revenue +8%, non-IFRS operating profit +19% year-on-year, continuing to maintain the multiplier effect of faster profit growth than revenue

3Q2024's revenue was +8% YoY, +4 month-on-month; gross profit +16% YoY, +3% month-on-month; Non-IFRS operating profit +19% YoY, +5% month-on-month; and 3Q2024's gross margin increased 3.6 pct year over year, with a slight decrease of 0.2 pct. 3Q2024's operating expenses, +12% year over year and +5% month-on-month, were slightly higher than our and Bloomberg expectations, but the expense ratio was still relatively low. The company's business-level revenue, gross profit, and operating profit were basically in line with our expectations and Bloomberg's expectations, and continued to maintain the trend of year-on-year growth in non-IFRS operating profit > year-over-year growth in gross profit > year-on-year growth in revenue.

3Q2024's non-IFRS net profit was +33% YoY and +4% month-on-month, exceeding Bloomberg's expectations by about 10%. In our report “Projected Profit Growth Resilience - Tencent Holdings 3Q2024 Performance Forecast” released on October 31, we have proposed that 3Q2024 companies expect a year-on-year increase in profit and loss of joint ventures and a year-on-year decline in non-IFRS income tax rates, which will drive non-IFRS net profit to mother to grow faster than operating profit. The actual situation is basically consistent with our judgment. We expect these two net profit drivers to continue to play a positive role in the fourth quarter.

Online games: The revenue growth rate increased as scheduled in 3Q24. Continue to follow the operating rhythm of “Dungeons and Warriors: Origins” 3Q2024, the company's online game revenue was +13% year-on-year, which is basically in line with our expectations and Bloomberg's expectations. Game revenue in China was +14% year over year, slightly higher than our expectations, driven by things including “Fearless Contract”, “Wang Zhe Rongyao”, “Peace Elite”, and “Dungeons and Warriors: Origins.” According to Nexon, 3Q2024's revenue in China was +138% YoY. In addition, the company's results will reveal a year-on-year increase in “Wang Zhe Rongyao” sales in the third quarter, a double-digit year-on-year increase in “Peace Elite” sales, and Evergreen Gaming's operations continued to gain strength.

3Q2024's overseas game revenue was +9% YoY (+11% at a fixed exchange rate), slightly lower than our expectations. The growth rate of overseas game revenue lagged significantly behind the revenue growth rate. Due to the increase in the retention rate of some games, the company extended the revenue deferral cycle accordingly.

Looking ahead, we expect game revenue growth to continue to accelerate in the fourth quarter. Continue to monitor the operating pace of “Dungeons and Warriors: Origins”. Although Nexon is relatively cautious about the 4Q2024 revenue guidelines in China, the company's management also indicated at the performance meeting that it is expected that the fourth quarter will be an integration period for “Dungeons and Warriors: Origins”. Next year, important content updates will be released during the Spring Festival to increase user retention and monetization.

Marketing services: 3Q2024 revenue +17% year over year. Continued focus on video advertising plus inventory rhythm 3Q2024 The company's marketing service revenue was +17% year over year, flat month-on-month, which is basically in line with our expectations and Bloomberg expectations. The year-on-year increase in advertising spending in the game and e-commerce industries in the third quarter surpassed the reduction in spending in the real estate and food and beverage industries.

1) Video ad revenue increased by more than 60% year on year in the third quarter. Currently, the video ad loading rate is far lower than that of peers. We are optimistic about the driving effect of video accounts increasing inventory in the medium term. Tencent has established an indexed and standardized e-commerce platform system through WeChat stores. We believe that in the long run, the development of the e-commerce ecosystem is expected to circulate with advertising products such as video accounts.

2) The year-on-year growth rate of search advertising revenue in the third quarter was over 100%, and the commercial search volume and click rate of WeChat Search increased year-on-year.

WeChat Search uses LLM capabilities to improve understanding of complex searches and content, and enhance the relevance of search results.

FBS: 3Q24 revenue was +2% year over year, payment TPV growth rate rebounded in October. GPU-related cloud revenue has reached a certain scale of +2% compared to 3Q2024's fintech and enterprise service revenue, which is in line with our expectations and slightly lower than Bloomberg's expectations. Revenue from fintech services was generally stable year-on-year in the third quarter, with revenue from payment services falling year-on-year. The company's results will mention that payment TPV growth rate increased in October, and payment revenue growth in the fourth quarter may be expected to improve. It is worth noting that in the third quarter, the company's GPU-related cloud revenue accounted for double digits of IaaS cloud revenue, and the incremental computing power demand brought about by AI gradually contributed a certain amount of revenue.

Investment advice:

Considering that the company's game layout system is mature, the commercialization of WeChat searches is increasing, and the growth rate of financial payments is expected to pick up with macro demand, we raised our 2024-2026 forecast non-IFRS net profit to 228.1/264.9/294 billion yuan (the original forecast was 217.8/251.7/278.6 billion yuan), with year-on-year growth rates of 45%/16%/11%, respectively. As of 2024/11/17, the company's stock price corresponding to the 2024/2025/2026 forecast PE was 15x/12x/11x, respectively. The 12-month Bloomberg rolling forecast PE was below the 5-year median 1.1 standard deviation, which is at the historical quantile of 11%. Compared to the NASDAQ, Bloomberg's 12-month outlook PE is 1.5 standard deviations below the 5-year median, at the historical quantile of 8%, and the valuation is relatively low. We expect game growth to accelerate in the fourth quarter, and the advertising and financial business is expected to benefit from macroeconomic recovery. After compounding performance, repurchases may resume, which will help improve valuation constraints. Maintain a “buy” rating.

Risk warning: macroeconomic growth is uncertain; there is uncertainty about the company's new game launch; AI commercialization is slower than expected.