Tencent's 24Q1 achieved operating revenue of 159.5 billion yuan, up 6% year on year, slightly exceeding agreed expectations; adjusted net profit to mother was 50.3 billion yuan, up 54% year on year, exceeding the consistent forecast by 17%. Among them, the growth rate of advertising and games exceeded expectations, and the growth rate of fintech and corporate services was slightly lower than expected; profit margins greatly exceeded expectations, with a gross profit margin of 52.6% and an adjusted net profit margin of 31.5%, a record high in 17 years.
Domestic games were slightly better than expected, and overseas sales increased rapidly. According to financial reports, domestic game revenue in Q1 decreased by 2% year on year (better than the agreed forecast of 4% year-on-year decrease), overseas game revenue increased 3% year on year (in line with expectations), and overall game revenue declined slightly. However, judging from the performance and delays, the Q1 distribution end was stronger than expected. The overseas distribution end increased 34% year over year. According to point data, the Q1 sales volume of “Battle in the Wilderness” under Supercell increased by nearly 260% year on year (but the delay period was long); domestic “Wang Zhe Rongyao” and “Peace Elite” corrected year on year in March. We measured the Q1 pipeline growth rate at the single-digit level. Starting in Q2, the game is expected to grow positively year on year: “DNF Mobile Game” was launched on 5.21; subsequent “Need for Speed” and “Breaking the Stars” are worth watching. We expect the growth rate to rise to 20% in the second half of the year. The overall gross margin of value-added services increased from 54% in the same period last year to 57%, mainly driven by high-margin subscription revenue for mini games and music. The low-margin live streaming business is still shrinking.
Ad revenue growth and gross margin growth continued to accelerate month-on-month. According to financial reports, Q1 advertising revenue increased 26% year over year (better than the consensus forecast of 18%; 23Q3/Q4 year-on-year growth rates were 20%/21%, respectively), and WeChat ads all increased (video accounts, mini programs, public accounts, and search). We speculate that video numbers are still the core driver. Total user time increased by more than 80% year over year, and superimposed AI technology improved accuracy. The increase in advertising gross margin accelerated. Q1 was 55%, up 13 pcts year on year (23Q3/Q4 increased 5.9 pct/12.6 pct year on year, respectively).
Fintech and corporate services grew and changed, and gross margin continued to rise. According to financial reports, Q1 fintech and corporate services revenue increased 7% year over year. The single-digit year-on-year increase in revenue from fintech services, and the growth rate slowed slightly (23Q4 was a double-digit year-on-year increase), mainly due to a slowdown in offline consumer spending growth and a decrease in withdrawals, but strong growth in high-margin wealth management revenue is a medium- to long-term growth point. Enterprise service revenue increased by more than 10% year-on-year, and technical service fees for cloud services and video account merchants (which have been charged since '23) are growing. The gross margin of fintech and corporate services is 46%, and as of 24Q1, it has been increasing for 6 consecutive quarters; cloud business costs have improved, and new growth point financial management services and technical service fees for video account merchants are all high-margin businesses.
Other businesses, mainly IP operations, saw a double increase in revenue and profit, including copyright issuance and derivatives sales. According to financial reports, Q1's other revenue increased 110% year over year, and gross margin changed to 23%.
In terms of cash flow, according to financial reports, 24Q1 net cash was $925 billion, compared to $54.7 billion in the same period last year; 24Q1 free cash flow was $51.9 billion. The 24Q1 capital expenditure was 15.2 billion, compared to 4.6 billion in the same period last year, a significant increase. In addition to implementing dividends and over 100 billion repurchases as planned, the company continues to invest in AI technology to enhance platforms and high-value content.
Maintaining the buying rating: Considering that the company's high gross margin business is growing well, leading to an increase in overall profit margins, we have raised our profit forecast. The adjusted net profit for 24-26 is estimated to be RMB 1900/2261/251 billion yuan (the original forecast was 1801/2096/2301). The target market value was raised from RMB 3818.4 billion to RMB 403.51 billion, and the corresponding target price was HK$471. Based on a 23% increase, the buy rating was maintained.
Risk warning: Internet financial regulation changes, game regulation changes, macroeconomic recovery falls short of expectations.