2021Q3 performance outlook: we expect the company's 2021Q3 revenue to be 144.6 billion yuan, an increase of 15.3% over the same period last year, and an adjusted net profit of 32.5 billion yuan, an increase of 0.6% over the same period last year. From a sub-sector point of view, both advertising and game business are under pressure. we expect advertising business Q3 to grow by 15.1% to 24.6 billion yuan, game business by 9.6% to 45.4 billion yuan, and financial technology and corporate services by 30% to 43.2 billion yuan.

The new regulatory mechanism limits the growth of advertising revenue in the short term, and the platform further strengthens compliance operations. In terms of advertising business, the flow of users of Wechat, QQ and other social platforms is stable, and the revenue is expected to continue to grow, but affected by the new advertising regulatory mechanism, Tencent is expected to have a certain impact on the number and mode of advertising, such as Mini Program and app open-screen advertising restrictions, the new regulatory mechanism requires Tencent to reduce the time of opening ads for her main products Tencent Video, QQ Music and so on. Tencent's measure is that it can be skipped immediately from 5 seconds. Compared with its competitor BABA, it has directly cancelled the open-screen advertisements of Taobao, Alipay and other major APP. At the same time, it has also stepped up the examination and crackdown on the content of false and illegal advertisements, and the number of ads off the shelves has exceeded four digits. In terms of the industry, the advertising of the education industry has been reduced, and short-term regulatory policies such as anti-addiction of minors' games and extension of version numbers have also affected the advertising efforts of the game industry, and advertising business is under short-term pressure.

The revenue of the head game products is growing steadily, and the main new game Q4 is coming online. Driven by the main products such as "Arena of Valor" and "Game for Peace", the company's game business still maintains steady growth. In terms of new games, the launch of the core new games has been postponed due to the further improvement of laws and regulations on underage civil air defense addiction this quarter. Tencent launched the mobile game "the Battle of the Golden Shovel" on August 26 and ranked sixth in the APP Store ranking in September, but in addition, Tencent lacked key games or well-known IP games in the third quarter. This situation is expected to improve Q4, the company's core product "League of Legends mobile games" on October 8 public test, and strictly follow the new anti-addiction policy. As a major PC game IP products, "League of Legends Mobile Games" quickly entered the top 10 of Weibo Corp's hot search list on its first day of launch, and became a hot topic on major social platforms. From the return of PC gamers and the successful operation status of Tencent in the mobile game e-sports market, it is inferred that this product may lead to a large flow increment and will support the company's game business growth for a long time. We believe that Tencent is fully adapting to the compliance operation under the new regulatory situation, and in the long run, its traditional business such as advertising and games will continue to develop healthily after the adjustment of the industry.

Mobile finance and digital payments have developed healthily, and cloud and enterprise services have been upgraded and broadened. Relying on the concept of benefiting small and medium-sized enterprises, the number of daily active users and payment frequency of Tencent Mobile Finance has increased steadily compared with the same period last year. With the easing of the epidemic, the scale of digital payment and investment has rebounded, but due to repeated epidemics in some areas, it will still have a small impact. Cloud and enterprise services have further improved in technology and product development, infrastructure construction and the promotion of PaaS and SaaS technologies have played a role, helping more enterprises to achieve intercommunication and cooperation between internal and external customers, thereby improving office efficiency. It is expected that the interconnection of cloud and enterprise services will grow rapidly in the third quarter and in the long run with technology upgrading.

Profit forecast and valuation: we expect the company's revenue from 2021 to 2022 to be 565.2 billion yuan and 664.8 billion yuan respectively, and the nongaap net profit to be 135.2 billion yuan and 155.2 billion yuan respectively. The current market capitalization of the company corresponds to 26 times of PE in 2022. We believe that the company's main business maintains healthy development, long-term growth is still good, and the "buy" rating is maintained with a target price of HK $615.

Risk tips: policy management risk; core business competition environment deterioration risk; game product extension risk; cloud services and financial technology business are not as expected.