Overall performance: estimated revenue +8% YoY, non-IFRS operating profit +17% YoY

We expect Tencent's revenue in 3Q2024 to be +8% YoY and +4% YoY. We expect that the year-on-year growth of the company's game revenue will continue to accelerate in the third quarter. The growth rate of advertising revenue will decline slightly but will remain resilient, and the growth rate of fintech and corporate services revenue will slow down at a low level.

We expect the company's overall gross profit in 3Q2024 to be +16%; the overall gross margin will be 53.3%, up 3.9 pcts year over year, and basically flat from month to month. The share of incremental businesses with high gross margins is expected to continue to rise.

We expect 3Q2024's non-IFRS operating profit to be around 60.5 billion yuan, a year-on-year increase of 17%. We expect that the company's overall expenses will continue to be carefully controlled, and that core operating profit will grow faster than gross profit.

We expect 3Q2024's non-IFRS net profit to be approximately $57.4 billion, up 28% year over year. We expect 3Q2024 non-IFRS net profit to grow faster than operating profit. The main factors are: 1) Profitability of some key investment companies is expected to increase year-on-year in 3Q2024, driving Tencent's share of profits and losses in joint ventures to continue to increase year-on-year. 2) Considering that the 2Q2024 corporate results meeting mentioned that the non-IFRS income tax rate for the full year of 2024 is expected to be 18%-20% (22% in 2023), we expect the 3Q2024 non-IFRS income tax rate to continue to decline year-on-year.

Although consumer demand and advertisers' advertising demand in the third quarter may be affected to a certain extent by the macro environment, we expect that the improved supply of Tencent's games and advertising business will provide strong resilience to business profit growth. Combined with factors such as relatively strict cost control and joint venture companies' share of revenue, the company's profit is expected to continue to grow at a high level.

Online games: We expect the year-on-year growth of domestic/overseas game revenue to continue to accelerate. We expect 3Q2024's online game revenue to be +13% year over year, its domestic market revenue +12% year over year, and overseas market revenue +15% year over year. Looking ahead, we expect Tencent's game business revenue growth to continue to accelerate month-on-month in the fourth quarter, and continue to pay attention to “Pokémon Gathering”, “Dawn of the Stars”, “Battle Against the Future”, “Final Fantasy 14: Crystal World”, and “ONE PIECE:

Schedule of reserve products such as “Zhuang Zhi Ambition” and “Fearless Contract Mobile Game”.

1) Domestic games. “Dungeons and Warriors: Origins”, which was launched on May 21, ranked in the TOP2-4 best-selling iOS game list in the TOP2-4 range, with a relatively good turnover curve. Considering the game's revenue deferred confirmation rules, we expect “Dungeons and Warriors:

“Origin” may contribute more significantly to revenue growth in the third quarter.

2) Overseas games. Considering that the iOS bestseller ranking of “Wild Battle” in major overseas markets in the third quarter did not change much compared to the second quarter, we expect that overseas game sales will continue to increase year-on-year in the third quarter, and that the year-on-year revenue growth trend will continue.

Online advertising: We expect revenue to be +15% year-on-year. Video advertising plus inventory may be a strong measure to hedge against fluctuations in demand. We expect 3Q2024 advertising revenue to be +15% year-on-year, mainly due to continued healthy growth in video channel traffic, orderly advertising expansion, and AI technology platforms. We expect the gross margin of the 3Q2024 advertising business to increase to 55.9%, mainly due to the fact that the share of high-margin video ads is expected to continue to rise, partly offset by Olympics-related content costs. Looking ahead to the fourth quarter, we expect that adding inventory to video accounts may be a powerful measure to hedge against fluctuations in demand.

Fintech and corporate services: We expect revenue growth of +2% YoY. The upward trend in gross margin is expected to continue. We expect 3Q2024 fintech and corporate services revenue to be +2% YoY, and the growth rate will continue to decline from 2Q2024. Mainly due to weak growth in macro consumption, we expect 3Q2024 fintech service revenue growth to continue to slow in the short term. The company's gross margin for fintech and corporate services continued to rise from 27.1% in 4Q2021 to 47.6% in 2Q2024, including the recovery of operating leverage driven by a recovery in macro demand, an increase in gross margin driven by cloud business restructuring, and the rapid development of video delivery technology service fees. We expect the upward trend in business gross margin to continue in the medium term.

Investment advice:

We believe that the product cycle of the company's game business will accelerate short-term game revenue growth. Video advertising and inventory may support the resilience of mid-term advertising revenue growth. Revenue growth in the fintech and corporate services business is expected to gradually recover along with the macro environment. The company's high-margin incremental business lays the foundation for a continuous increase in gross margin over the medium term. Combined with a relatively stable competitive pattern, it can maintain prudent expenses and expenses, and profit growth capacity is relatively obvious. We maintain our 2024/2025/2026 forecast non-IFRS net profit of 217.8/251.7/278.6 billion yuan. As of 2024/10/25, the company's stock price corresponding to the 2024/2025/2026 forecast PE was 17x/14x/13x, respectively. The 12-month Bloomberg rolling forecast PE is below 1 standard deviation of the 5-year median and is at the historical quantile of 17%. Compared to the NASDAQ, Bloomberg's 12-month outlook PE is 1.2 standard deviations below the 5-year median, at the historical quantile of 14%, and the valuation is relatively low. 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.