Core views

The company is the largest social networking platform company in China, and its huge number of users lays a solid foundation for the development of various businesses. As of 2024Q2, the number of monthly active users of the company's QQ was 0.571 billion.

WeChat is the communication and social networking platform with the largest user base in the country. As of 2024Q2, the number of monthly active users of WeChat was 1.371 billion.

The company is a leader in the Chinese game industry and is expected to fully benefit from the development of the industry. iResearch expects China's mobile game industry to grow at 4.65%, 3.91%, and 3.30% in 2024-2026, respectively.

According to data from Forward-looking Research Institute, in 2023, in terms of the company's gaming business revenue share, Tencent's market share was 48.2%. Applet games are developing rapidly, and the company is expected to fully benefit. The mini game market is growing rapidly, with active WeChat Mini Program game users reaching 0.75 billion in February 2024.

The company's 2024 semi-annual report revealed that the total sales volume of mini-games increased by more than 30% over the same period last year. As of November 2024, Tencent Games has more than 170 self-developed and agent games, and many games are very popular with players around the world.

Video accounts are a key business, driving the growth of the company's advertising business. In the first quarter of 2022, Tencent listed “video numbers” as one of the company's strategic growth areas. Tencent stated in its 2024 interim report that the revenue of the online advertising business increased 19% year-on-year to 29.9 billion yuan in the second quarter of 2024, mainly driven by the revenue growth of video accounts and long videos.

China's payments industry is growing steadily, and the company is expected to fully benefit as one of the oligarchs. The size of the third-party personal payment market in 2024-2026 was 391.5 trillion, 429.6 trillion, and 467.6 trillion, respectively, with year-on-year growth rates of 10.8%, 9.7%, and 8.9%, respectively. According to data from mobile payment networks, in Q3 2023, Alipay and WeChat Pay had transaction volumes of 118.19 trillion yuan and 67.81 trillion yuan respectively, accounting for more than 94% of the total market share. WeChat Pay, on the other hand, uses its powerful social networking effects to expand the offline payment scene. It is expected to fully benefit from the growth of the industry.

Investment advice

First coverage, giving a “buy” rating. The company is a leading Internet company and a leading enterprise in the domestic game industry, and is expected to fully benefit from the continuous development of the game industry. At the same time, the company is actively promoting the video channel business, driving the rapid growth of online advertising revenue. We expect the company's net profit to be 170.364 billion yuan, 191.176 billion yuan, and 216.284 billion yuan respectively, with year-on-year growth rates of 47.86%, 12.22% and 13.13%, respectively. EPS is 18.38 yuan/share, 20.63 yuan/share and 23.34 yuan/share, respectively, corresponding to the closing price of November 27 at HK$402.80. The exchange rate of HKD/RMB on that day was 0.92 and PE 20.16 respectively times, 17.96 times, and 15.88 times. Compared to NetEase, the company's valuation is higher than NetEase. Considering that the company's revenue and net profit growth rate are both expected to be higher than NetEase, we gave it a “buy” rating.

Risk warning

Repurchases are progressing slowly, video channels are progressing slowly, and game traffic falls short of expectations.