Event: On November 14, Tencent Holdings announced 3Q24 results. The 3Q24 company achieved non-IFRS net profit of 59.8 billion yuan (yoy +33%), versus expected 54.4 billion yuan; revenue of 167.2 billion yuan (yoy +8%).

Comment: 24Q3 operating profit was slightly weaker than expected, income tax expenses were significantly better than expected, and the share of joint venture profits exceeded expectations. 1) Income tax expenditure of 8.9 billion yuan (yoy -19%) vs. estimated 12.4 billion yuan is mainly due to the high base impact of withholding income tax provisions for the same period last year. Tax rate fluctuations have little impact on the operating level. The actual income tax rate of 14.2% is close to the corresponding quarterly level in 19-22, and subsequent income tax rates are expected to remain within a reasonable range. 2) The net profit of joint ventures and joint ventures accounts for 6 billion yuan versus an estimated 4.8 billion yuan. Companies such as Pinduoduo and Kuaishou that invested in the early stages are gradually maturing, and it is expected that this will continue to improve. 3) The gross profit margin was 53.1%, slightly lower than the forecast of 53.4%. The month-on-month decline in advertising gross margin was mainly due to an increase in the cost of content such as the Paris Olympics. The gross margin of value-added services has continued to grow under the pressure of the new “Dungeons and Warriors” mobile game to split the cost of certain IPs. The increase in the cost efficiency of cloud services and the increase in high-margin financial management revenue are driving the increase in the gross margin of Jinke Enterprise Services. 4) Operating profit of 53.3 billion yuan, slightly lower than Bloomberg's agreed estimate of 54 billion yuan. Sales expenses of 9.4 billion yuan vs. expected 9.1 billion yuan. The promotion of new games was stronger than expected; general and administrative expenses of 29.1 billion yuan vs. expected 28.2 billion yuan, or an increase in R&D expenses due to a significant increase in Capex.

Business segment: User participation in the WeChat ecosystem grew healthily in 24Q3. The number of monthly active WeChat and WeChat accounts is 1.38 billion (yoy +3%). Mini program GMV super 2 trillion yuan (yoy+ super 10%). WeChat stores are quickly established and linked to various WeChat components, and are expected to be fully integrated into the e-commerce ecosystem, providing a standardized trading environment, and increasing transaction volume. Game revenue in the local market is 37.3 billion yuan (yoy +14%) vs. expected 37 billion yuan. The flagship games “Wang Zhe Rongyao” and “Peace Elite” maintained healthy growth, and “Fearless Pact” contributed more. With incremental revenue from new products such as “Dungeons and Warriors: Origins” gradually being confirmed, and subsequent product lines are intense, games in the 24Q4 local market are still expected to maintain relatively rapid growth.

Game revenue in overseas markets is 14.5 billion yuan (yoy +9%) vs. estimated 15 billion yuan. The year-on-year increase in total turnover was higher than the revenue growth rate, and the retention rate of some games increased, and the revenue deferral cycle was extended accordingly. This revenue increase is expected to be gradually released in subsequent quarters. The social network's revenue of 30.9 billion yuan (yoy -4%) was in line with expectations. Mobile game virtual item sales, paid music membership revenue, and mini game platform service fees have increased. Revenue from marketing services is 30 billion yuan (yoy +17%) vs. estimated 29.8 billion yuan. The growth rate is better than that of the industry. Along with the promotion of GMV applets and the promotion of WeChat stores, merchants prefer the WeChat system; AI brings increases in material optimization and understanding of users' commercialization decisions. Fintech and corporate services revenue of $53.1 billion (yoy +2%) vs. expected $54.1 billion. Payment services declined due to weak consumption, while fees for financial management, cloud services, and video delivery services also increased.

Profit forecast, valuation and rating: The 3Q24 company's non-IFRS net profit increased significantly, accounting for the joint venture's profit improvement, maintaining optimism as DNF mobile games and other products gradually confirmed revenue, video advertising+live e-commerce promotion, operating leverage optimization under efficiency and cost reduction, and maintaining the company's 24-26 non-IFRS net profit forecast of 2,255.2,8/543.9/ 276.16 billion yuan, respectively.

Current prices correspond to 24-26 non-IFRS PE 16/14/13 times, respectively, and the company is still a relatively strong platform during the weak macroeconomic recovery period. Research and development efficiency can be expected after the game organization structure is adjusted; it is expected that new products such as the “Fearless Contract” mobile game and “King's Glory World” will increase. WeChat advertising demand is showing resilience, and 4Q e-commerce marketing is expected to increase. Video accounts contributed more to e-commerce Double Eleven. Maintain a “buy” rating and maintain a target price of HK$430.

Risk warning: Risk of regulatory uncertainty, macroeconomic risk, game performance falling short of expectations, increased competition.