Consider the potential impact of regulation
Taking into account the potential regulatory impact on games and consumer Internet businesses, we downgrade our revenue growth forecasts for social networking services (SNS) / games / online advertising and valuation multiples for online games. We expect stronger-than-expected growth in the financial technology and corporate services business, which is also reflected in recent results. Therefore, we maintain the CAGR forecast of net profit under the total income / non-IFRS caliber basically unchanged at 16.2% (previous value: 17.3Comp16.1%). In 21-23, the EPS of non-IFRS is 14.3, 17.0 and 19.8 yuan. We move the valuation window forward to 22 years, based on the fact that the target price of SOTP is HK $608.0 (previous value: HK $669.4), corresponding to 29.8 IFRS 25.4 times 22max 23 non-IFRS PE, if the strategic investment valuation is excluded, it corresponds to 24.1 amp 20.6 times 22max 23 forecast PE. Keep buying.
Consumer Internet business may face high base impact before 4Q22. We predict that the company's game revenue CAGR will be 11.3% in 2021-2023, mainly driven by overseas market growth. We expect game overseas market revenue to account for about 30% of the company's game revenue by 2023. Taking into account the impact of regulations that limit the duration of minors' online games, we have lowered our 2021 Universe 2022 game revenue forecast by 1.3%. In addition, due to the weak performance of the live broadcast business due to tighter regulation and increased competition, we have lowered our CAGR forecast for social networking service revenue from 2021 to 2023 to 10.8% (previous value: 12.3%). Tencent will continue to improve the efficiency of traffic utilization and enhance the ROE and long-term competitiveness of its consumer Internet business in the future.
Optimistic about the long-term growth of advertising, financial technology and corporate services, we predict that online advertising revenue will grow by 16.0% in 2023. Regulations on extracurricular tutoring, splash screen advertising and user data privacy will begin to affect the online advertising industry at 2H21. In the long run, we are optimistic about Tencent's competitiveness in the online advertising industry, because Tencent has a constantly improving advertising ecosystem and its own IP content, and can more flexibly help businesses improve the return on advertising investment. We believe that Tencent's openness to other ecosystems will also create more cash opportunities. We remain optimistic about the outlook for its fintech and enterprise services business, raising its 21-23 revenue CAGR forecast to 29.7% (previous value: 28.8%), and expect this business to account for 35.8% of total revenue in 2023 (2020: 26.6%).
Invest to build a sustainable growth future
In order to achieve sustainable growth, Tencent continues to invest, and we expect management fees as a share of total revenue to rise from 14.0% in 2020 to 15.5% in 2021, followed by a slight decline to 15.1% in 2023. We predict that net profit in non-IFRS terms will grow by 13.1% year-on-year in 2021, followed by an acceleration of 18.4% year-on-year growth in 2022 in 2023.
Risk tips: 1) increased competition in the social networking sector; 2) slower revenue growth in the gaming business; and 3) tighter regulation in the financial technology sector.