Incident: In 2024Q3, Tencent achieved revenue of 167.2 billion yuan, up 8% year on year, non-IFRS operating profit of 61.3 billion yuan, up 19% year on year, and non-IFRS net profit of 59.8 billion yuan, up 33% year on year.

Comment:

Value-added business: The game business grew strongly, thanks to the steady performance of Evergreen Gaming and the contribution of new games. 24Q3's game business achieved revenue of 51.8 billion yuan, up 13% year on year. The deferred revenue balance for the quarter was 113.1 billion yuan, up yoy +23% year over year and 1% month on month, reaching a record high, which is expected to provide solid support for subsequent revenue growth. Among them, domestic game revenue was 37.3 billion yuan, up 14% year on year, and the growth rate increased significantly. The flagship Evergreen game “Wang Zhe Rongyao” and “Peace Elite” achieved healthy year-on-year growth; the average daily activity of the other Evergreen games “Naruto” mobile games and “Fearless Contract” reached record highs; the first multi-terminal first-person shooter “Operation Delta” achieved high average daily user usage time and retention rates after launch, showing Evergreen's potential. International game revenue was 14.5 billion yuan, up 9% year over year, and games such as “PUBG MOBILE” and “Wild Brawl” performed well. “VALORANT” expanded from PC to PlayStation and Xbox, launched console versions in five key international markets, and achieved a year-on-year increase of over 30% in Q3 sales. The growth rate of game revenue in the international market is lower than the revenue growth rate. It is mainly due to the increase in the retention rate of some games, and the company has extended the revenue deferral cycle accordingly. Social network revenue increased 4% year over year to 30.9 billion yuan, the number of paid music members increased 16% year over year to 0.119 billion; the number of paid Tencent video members increased 6% year over year to 0.116 billion yuan.

Marketing services: Video accounts have performed well, and advertising commercialization still has great potential for improvement. 24Q3's marketing services achieved revenue of 30 billion yuan, an increase of 17% over the previous year. Mainly driven by video accounts, applets, and WeChat search ads, advertising expenses in the game and e-commerce industry increased year-on-year, exceeding the reduced expenses of the real estate and food and beverage industries. Under pressure from the macro environment, the company's advertising business has shown strong resilience, but the overall commercial content of video ads is still relatively restrained. The ad load is only a single digit, and there is great potential for improvement. The year-on-year growth of QQ MAU recovered in 24Q3, and the number of combined monthly active accounts on WeChat and WeChat increased further to 1.382 billion, a net increase of 11 million over the previous month.

Fintech and corporate services: Continuing to increase ToB business. 24Q3's FBS business achieved revenue of 53.1 billion yuan, an increase of 2% year on year. Revenue from fintech services remained stable year over year. Among them, revenue from financial management services increased year on year due to the increase in the number of users and the increase in customer asset holdings, and revenue from payment services declined due to weak consumer spending. Revenue from enterprise services increased year-on-year, mainly due to increases in cloud service revenue and merchant technical service fees. The 24Q3 applet achieved more than 2 trillion yuan of GMV, an increase of more than ten percentage points over the previous year, and achieved better coverage and better solutions in application scenarios such as ordering food, electric vehicle charging, and medical services. The contribution of video account merchants to technical service fees continues to increase, video stores have been upgraded to WeChat stores, and the e-commerce trading ecosystem continues to improve. The company released Tencent Hybrid Turbo, an upgraded basic model using a heterogeneous hybrid expert architecture (MoE), doubling training and reasoning efficiency and reducing inference costs in half.

Investment suggestion: Considering the strong growth of the company's game business, there is still plenty of room for improvement in advertising commercialization. We expect the company's FY2024-2026 revenue to be 657.1/717.8/776.6 billion yuan respectively, up 7.9%/9.2%/8.2% year on year, and net profit attributable to non-IFRS is 222.6/251.7/275.3 billion yuan, respectively, up 41.1%/13.1%/9.4% year on year, corresponding to Non- PE is 16/14/13x under IFRS caliber, maintaining a “buy” rating.

Risk factors: Short-video platforms are being squeezed; the launch effect of game products falls short of expectations; stricter regulation of the platform economy, etc.