Overall performance: 1Q25 revenue and profit growth was strong. AI capabilities have contributed substantially to 1Q25's revenue by 13%, gross profit +20%, non-IFRS operating profit +18%, and non-IFRS net profit +22% year-on-year. Revenue and profit have clearly exceeded Bloomberg's agreed expectations.
1Q25 revenue clearly exceeded Bloomberg's expectations, mainly due to strong growth in gaming and advertising revenue. The 1Q25 consolidated gross margin exceeded Bloomberg's expectations by 1.9 pct, mainly due to the gross margin of value-added services, fintech and corporate services exceeding expectations, as well as an increase in the share of high-margin domestic revenue sources such as games, mini-games, video accounts, and search.
In 1Q25, the company's operating expenses were +28% year over year, exceeding Bloomberg's expectations. 1Q25 management expenses were +36% year-on-year, mainly due to a one-time share reward of 4 billion yuan and an increase in AI related R&D expenses. Despite the promotion of AI native applications in 1Q25, sales expenses increased by only 4% year over year, and sales expenses rate decreased year over year.
Additionally, 1Q25 financial costs were +37% year-on-year, mainly due to exchange gains and losses. In 1Q25, non-IFRS accounted for 7.6 billion yuan in the joint venture's profit, a slight decrease of 0.1 billion yuan over the previous month. It may also reflect the stabilization of the overall profit of the joint venture (the previous 2 quarters contracted month-on-month).
Capital expenditure for 1Q25 was 27.5 billion yuan, down from the previous quarter's peak of 36.6 billion yuan. The company emphasizes that AI capabilities have made substantial contributions to performance advertising and evergreen gaming. A number of AI features were launched within WeChat this quarter, including adding AI service ingots as WeChat contacts. Tencent Cloud launched the Agent Agent, CodeBuddy, China's first MCP-enabled code assistant, which is deeply integrated with WeChat developer tools to provide a one-stop applet development solution. Looking ahead, we expect the cooperation between WeChat and Yuanbao around the Agent function to continue to deepen. Considering Tencent's strong advantages in entrances, scenarios, social relationship chains, information/content ecology, and applet infrastructure, we are firmly optimistic about the company's competitive potential in the Agent circuit.
Online gaming: 1Q25 revenue and revenue growth was strong. “Dreadnought Mobile Games” is expected to benefit from IP breaking 1Q25 online game revenue +24% year-on-year, significantly exceeding Bloomberg's 15% expectations. Mainly due to domestic game revenue +24% year over year, exceeding Bloomberg's forecast of 17%, and overseas game revenue +23% year over year, exceeding Bloomberg's forecast of 13%. Despite strong revenue growth confirmed by games this quarter, the balance of deferred revenue at the end of the period was still +16% year over month and +23% month over month, which may reflect strong growth in game traffic in the first quarter, helping to hedge against subsequent revenue base pressure.
The company's new game “Goddess of Victory: A New Hope” will be launched on May 22, and its overseas version has performed well before. The heavy reserve product “Fearless Contract Mobile Game” had more than 10 million subscribers 48 hours after opening reservations in April. The mobile game version of “Fearless Pact” has grown strongly in the past 2 years. We believe that this IP is already popular among young users and has high social popularity. After the mobile game is launched, it may help balance the high base pressure in the second half of the year.
Marketing services: 1Q25 revenue exceeded expectations, and the trend of increasing advertising inventory and AI-driven effectiveness is expected to continue 1Q25 marketing services revenue +20% year-on-year, exceeding Bloomberg's expectations of 17%. The gross profit margin of advertising is about 56%, slightly higher than the same period last year. The month-on-month decline may be mainly due to the low e-commerce season. Demand continues to be strong for video accounts, applets, and WeChat search ad inventories.
By improving generative AI capabilities, the company upgraded advertising technology platforms, including assisted advertising production, digital live streaming, and deepening understanding of products and user interests to enhance recommendation effectiveness. According to the facts, the WeChat Business Group has set up an e-commerce product department, which is responsible for exploring the trading model within WeChat, accelerating the development of trading infrastructure and trading ecosystem, and operating the new WeChat trading model. With the gradual development of the WeChat e-commerce ecosystem, it is expected to accelerate the growth of internal circulation advertising.
FBS: 1Q25 gross margin exceeded expectations, and payment and cloud service cost revenue increased +5% year-on-year in 1Q25, in line with Bloomberg's expectations; the division's gross profit margin was 50%, exceeding Bloomberg's forecast of 2.7 pct, mainly due to the increase in revenue contributions from high-margin consumer loan services and financial services, as well as the increase in the cost benefits of payment services and cloud services.
Investment recommendations:
Considering that the company's advertising effects are clearly benefiting from AI technology, the reserve game is expected to gradually launch. We maintained the 2025 forecast non-IFRS net profit of 264.9 billion yuan, raised the 2026 forecast non-IFRS net profit to 2,965 (originally 294 billion yuan), and added the 2027 forecast forecast for non-IFRS net profit to be 330.3 billion yuan, corresponding year-on-year growth rates of 19%/12%/11%, respectively. As of 2025/5/14, the company's stock price corresponds to the 2024/2025/2026 forecast PE is 16x/14x/13x, respectively. The 12-month Bloomberg rolling outlook PE is 0.3 standard deviations below the 5-year median and is at the historical quantile of 37%. Compared to the NASDAQ, Bloomberg's 12-month outlook PE is 0.6 standard deviations below the 5-year median, at the 27% historical quantile, and the valuation is relatively low. We are optimistic about the company's strong competitiveness and long-term growth potential in AI applications, and maintain a “buy” rating.
Risk warning: macroeconomic growth is uncertain; there is uncertainty about the company's new game launch; there is uncertainty about the pace of AI application implementation.
