On May 14, Tencent Holdings (HK, 00700) will release its financial report for the first quarter of 2024.
In 2023, Tencent achieved significant growth in gross profit and net profit for four consecutive quarters, and the fundamentals showed a V-shaped recovery. In the first quarter of this year, the growth trend is expected to continue, and Tencent's revenue and net profit may continue to maintain year-on-year and quarter-on-quarter growth, and the gross profit margin will remain at a high level.
Guohai Securities predicts that in the first quarter, Tencent's operating income will increase by 6% year-on-year to 159.3 billion yuan, an increase of 3% from the previous quarter, and the net profit attributable to the parent company of NON-IFRS will increase by 35% year-on-year to 44 billion yuan, an increase of 3% from the previous quarter, and the profit will once again lead the revenue growth rate, with an estimated gross profit margin of about 49%, a non-IFRS operating profit margin of about 34%, and a net profit margin of about 28% for the non-IFRS parent company.
In the core business segments, financial technology and enterprise services, and online advertising business are expected to continue to maintain double-digit year-on-year growth, and with the recent launch of blockbuster new games, the market is widely expected to resume growth in the second quarter.
In the first quarter of this year, Tencent's cumulative repurchases reached HK$14.8 billion, with an average daily repurchase amount of HK$824 million, and the total number of shares repurchased by Tencent is expected to reach HK$132 billion in 2024, exceeding the lower limit of the previously announced annual repurchase plan of 100 billion yuan.
Driven by the high-quality growth of the business and the unexpected return of shareholders, and the recovery of the Hong Kong stock market, Tencent's share price rebounded to HK$370, the highest increase of nearly 40% since March.
The growth momentum of high-margin businesses such as video accounts and advertising is strong
In the fourth quarter of 2023, Tencent's gross profit increased by 25% year-on-year, and its gross profit margin reached 50%, both of which are at the highest level in recent years.
Among them, the gross profit of the three core businesses of online advertising, financial technology and enterprise services, and value-added services increased by 55%, 50%, and 6% year-on-year respectively in the quarter.
Driven by Channels advertising and large-scale model technology, the gross profit margin of Tencent's online advertising business increased significantly from 44% in the fourth quarter of 2022 to 57%. After a strategic focus on adhering to the "healthy and sustainable" route, the gross profit margin of Tencent's fintech and enterprise services business also increased significantly from 34% in the same period of 2022 to 44%.
(Image source: Tencent's 2023 Q4 financial report)
CICC pointed out that Tencent's main growth logic at present comes from the high-quality growth strategy, the profit release of high-quality and high-margin businesses such as video number advertising and e-commerce, mini games, financial technology and enterprise services, and the company's active shareholder return strategy, which is expected to form a model of "EPS growth> adjusted operating profit growth> gross profit growth > revenue growth".
In the fourth quarter of 2023, Tencent's gross profit, operating profit (Non-IFRS), and net profit (Non-IFRS) grew by 25%, 35%, and 44%, respectively, all exceeding the growth rate of revenue. This trend is expected to continue in the first quarter of 2024.
Guosen Securities pointed out that at present, the video number is the key driver of Tencent's high-quality growth. Tencent Channels quickly achieved user growth through social distribution in the early stage, and now it has entered the early stage of commercialization, and the infrastructure construction of WeChat and advertising team is expected to further improve the efficiency of commercialization conversion. Channels have great potential for development, and Channels advertising and live streaming e-commerce are high-margin businesses, and their commercialization progress has a significant positive impact on Tencent's performance.
The brokerage predicts that Tencent's online advertising revenue in the first quarter will be 24.7 billion yuan, a year-on-year increase of 18%, and the follow-up internal circulation advertising revenue will gradually increase in the video account, and drive the gross profit margin of the advertising business to further increase.
In 2022, the sales of live streaming on Channels surged by more than 8 times year-on-year, and will continue to maintain a strong growth momentum in 2023. At present, the market generally believes that Channels e-commerce is in a critical period of commercialization in 2024. The technical service fee of Channels e-commerce will continue to contribute new high-quality and high-margin revenue to the fintech and enterprise service business.
At present, fintech and enterprise services are Tencent's largest revenue contributors. Guohai Securities expects that the revenue of this sector will increase by 12% year-on-year to 54.8 billion yuan in the first quarter, of which the payment business and cloud business are expected to maintain steady growth, and the commission of video number e-commerce will contribute to the marginal increase. For four consecutive quarters in 2023, Tencent's enterprise service business continued to maintain positive growth and improved gross profit margin.
In April this year, Tencent announced that all collaborative SaaS products such as WeChat Work, Tencent Meeting, Tencent Docs, Tencent Lexiang, Tencent e-Sign, and Tencent Questionnaire have been connected to Tencent's hybrid model to further facilitate a convenient and efficient intelligent experience for all kinds of users. Last quarter's Tencent financial report highlighted the deployment of generative AI functions in WeChat Work and Tencent Meeting, and the commercialization has been enhanced. With the support of large-scale model technology, the commercialization ability of more SaaS products will be improved, which will contribute high gross profit and high-quality revenue to Tencent Cloud's business.
Tencent's self-developed PaaS solutions, such as audio and video cloud and database, have also maintained rapid development in recent quarters, contributing new revenue with healthier profit margins. Represented by audio and video cloud, Tencent's international business has maintained rapid growth since 2023, with outstanding performance in Japan, Singapore, Malaysia, Indonesia, and the Middle East.
Huaxing Securities pointed out that Tencent Cloud's strategy of focusing on high-quality revenue sources has achieved remarkable results, which is expected to promote the gross profit margin of this sector.
The "DNF" mobile game is expected to accelerate the recovery of the game sector
According to the general expectations of brokerages, Tencent's online game business is affected by the high base of last year or under short-term pressure in the first quarter, among which, overseas game revenue is expected to maintain a single-digit year-on-year growth; After the second quarter, the launch of new games and the confirmation of turnover in the first quarter will drive Tencent's game revenue to rebound.
Tencent recently officially announced that on May 21, 2024, the blockbuster new game "Dungeons & Warriors: Origins" (referred to as "DNF") mobile game will be officially launched. According to the information on the official website, the data popularity of the "DNF" national server mobile game during the test period performed well, with more than 3 million people grabbing the number in the three days of the test number grabbing stage, and 230,000 people participating in the test on the first day of the service.
Developed by Nexon's subsidiary Neople, DNF was launched in South Korea in 2005 and has been an instant global success since its launch, surpassing 600 million users. In 2008, Tencent represented and released DNF in China, which became the fastest game to reach 1 million concurrent users, and set a record for 5 million concurrent users.
CICC said that although "DNF" is an old game, when the excellent mobile game of the same name is released in history, it will inherit the IP of the terminal game and the players accumulated over the years, and the "DNF" mobile game is expected to create a higher level of turnover.
Tencent's management also said at the last quarter's earnings meeting that the game business is expected to pick up in the second quarter of this year. CICC believes that this judgment contains the following three aspects: first, the management is confident in the recovery of overseas games; Second, domestic products such as "Golden Shovel Battle" and "League of Legends" mobile games have also performed well; Third, the turnover of the "DNF" mobile game may contribute significantly to the game revenue in the second half of the year, and on the whole, Tencent's investment logic at this stage still has a high degree of certainty.
BOCOM International also pointed out that on the whole, Tencent's mobile game turnover growth in the first quarter is still resilient, and revenue will be recognized in 2024.
Usually, Tencent Games' revenue will be recognized after 9 months, and Tencent Games' revenue in the past two quarters is actually mainly affected by last year's turnover performance.
According to third-party industry data such as Appmagic, QuestMobile, and Sensor Tower, Tencent's key games such as PUBG MOBILE, Golden Shovel Battle, League of Legends mobile game, Dark Zone Breakout, and overseas game Brawl Stars all performed well in the first quarter of this year, laying the foundation for revenue recognition in the following quarters.
According to QuestMobile data, the daily active users of "Golden Shovel Battle" in the first quarter have approached 20 million, ranking third among Tencent Games. "The Battle of the Golden Shovel" has entered the top 5 ranks in China in terms of daily activity and total game time, and is known as the biggest dark horse in Tencent's new games in recent years.
In the first quarter of this year, "Dark Zone Breakout" also performed well, with iOS revenue increasing by 104% year-on-year.
Since its launch in 2021, League of Legends mobile game has risen from the top 30 in the early days to the current top 5 in the best-selling list, and the iOS revenue in the first quarter of this year has increased by 63% year-on-year.
In the overseas market, according to Sensor Tower data, the number of overseas downloads of "PUBG MOBILE" increased by 20% month-on-month in March, and it continued to be the top player in the overseas mobile game download list. On the occasion of the 6th anniversary of its release, PUBG MOBILE launched a new version and a large number of themed gameplay and activities in mid-March, driving users to further activity.
According to the observation of BOCOM International Securities, "Brawl Stars" benefited from the restructuring of the business model and the addition of new gameplay to improve the user experience, and the turnover in the first quarter increased by 4 times year-on-year, reaching a new high of 580 million yuan in March.
The brokerage expects that Tencent Games' full-year performance will be low and high, with revenue expected to increase by 6% in 2024, local game revenue by 6%, and overseas game revenue by more than 7%.
(Photo source: BOCOM International Securities Research Report)