TENCENT Q4 financial report is about to be disclosed: Gross profit and net profit are expected to achieve double-digit high growth for two consecutive quarters

Source: CICC Online

On March 20th, TENCENT (HK, 00700) is set to disclose its financial report for the fourth quarter and full year of 2023. Currently, institutions predict that TENCENT's operating income in the fourth quarter will increase by about 8% year-on-year, reaching 157 billion yuan, while Non-IFRS net profit is expected to increase by approximately 33-35% year-on-year, reaching 40 billion yuan.

In 2023, TENCENT has achieved double-digit growth in revenue and profit for multiple quarters in a row. Driven by high-quality income, profit growth continues to outpace revenue growth, with gross profit growth also maintained at over 20%, surpassing revenue growth.

Institutions unanimously predict that TENCENT is expected to achieve operating income exceeding 610 billion yuan for the full year, Non-IFRS net profit exceeding 150 billion yuan, with a gross profit margin of 47%, surpassing the historical high of 46% in 2020.

Sealand Securities pointed out that TENCENT's core business is stable. In 2024, the company's game product reserves are rich, and the commercial potential of video ads and e-commerce continues to be released. They have given TENCENT a total target market value of 3.54 trillion yuan, corresponding to a target price of 375 yuan/412 Hong Kong dollars, and maintained a "buy" rating.

Looking at the business segments, TENCENT's core sectors such as financial technology and enterprise services, advertising, games, and WeChat's commercial ecosystem maintain strong momentum, with new growth highlights in each sector.

Financial technology and enterprise services sector achieve stable growth, becoming the top revenue pillar

According to Sealand Securities' estimates, the revenue representing the real economy in the financial technology and enterprise services sector in the fourth quarter of 2023 may reach 54.2 billion yuan, a 15% year-on-year increase and a 4% increase from the previous quarter.

In the process of consumption recovery, payment business is expected to continue double-digit year-on-year growth; cloud business maintains steady growth; and revenue from video live streaming e-commerce technical services may gradually increase.

Starting from the second quarter of 2021, the revenue from financial technology and enterprise services has continuously accounted for over 30% of TENCENT's revenue. By the third quarter of 2023, this proportion reached a new high of 34%, contributing the largest source of income for multiple consecutive quarters. This trend is expected to continue in the fourth quarter. This also means that in 2023, the financial technology and enterprise services sector has confirmed its position as TENCENT's largest revenue pillar.

In 2023, TENCENT Cloud continues to promote the "healthy and sustainable" strategy, strengthening the sale of self-developed products, promoting product integration, and allowing partners to take the lead, leading to a rebound in enterprise service revenue. This revenue has transitioned from a positive year-on-year growth rate in the first quarter, a significant increase in gross profit margin, to achieving low double-digit year-on-year growth in the second quarter, and an accelerated growth rate in the third quarter. This positive trend is expected to continue in the fourth quarter.

The large-scale models will also contribute new revenue to the enterprise service sector as TENCENT's internal business upgrades. As an application-level large model, over 400 businesses and applications within TENCENT have been connected to TENCENT's Holistic Large Model. Products with AI capabilities such as TENCENT Meeting and TENCENT Document have significantly upgraded their functions, which is beneficial for driving user and revenue growthOn the other hand, in the real economy consumption sector, video e-commerce is rapidly developing and integrating into new consumer formats, and the technical service fees related to live streaming e-commerce transactions have driven TENCENT's enterprise service revenue growth for multiple quarters.

Advertising revenue may hit a quarterly high, large-scale applications accelerating efficiency

It is widely expected that TENCENT's network advertising revenue will reach approximately 28.5 billion yuan in the fourth quarter, a year-on-year increase of 16%.

Although this growth rate may slow down compared to the first few quarters of 2023 due to the high base at the end of 2022, in absolute terms, TENCENT's network advertising revenue is expected to reach a new quarterly high again.

Since the fourth quarter of 2022, TENCENT's advertising sector has been the first to recover and has maintained double-digit growth for several quarters. With the introduction of new products and technologies such as video e-commerce and large-scale applications, this traditional internet business has regained vitality.

Benefiting from product innovation, in the third quarter report, TENCENT disclosed that the advertising revenue from the domestic circulation grew by over 30% year-on-year for the first time, contributing to over half of the WeChat advertising revenue. Sealand Securities estimates that the full-year video e-commerce advertising revenue in 2023 is expected to reach 13 billion yuan, and in 2024, with the acceleration of video e-commerce commercialization, TENCENT's domestic circulation advertising will continue to drive a substantial increase in video e-commerce advertising.

Benefiting from technological advancement, TENCENT's advertising has clearly defined the path of "growth driven by technology, with technology as the main force for commercialization." The best training ground for the "TENCENT Hybrid Large-scale Model" is in TENCENT's advertising.

According to public information, TENCENT's recommended large-scale model for advertising has a huge number of parameters and the ability to process large amounts of data and complex tasks. Compared to traditional models for digital advertising delivery, it can cover a more comprehensive range of industry characteristics and conduct in-depth analysis and processing of massive data in advertising delivery.

To enhance AI creative applications, in January 2024, TENCENT's advertising division launched the "One-stop AI Advertising Creative Platform," which has two types of capabilities: text-to-image and image-to-image, allowing AI to further enhance advertising delivery efficiency. Debon Securities pointed out that the advancement of AI technology in advertising systems improves accuracy, thereby enhancing the efficiency of unit traffic monetization.

Video e-commerce remains the highlight, WeChat components commercialization in full bloom

From the recent TENCENT financial reports in the past few quarters, it can be seen that user data within the WeChat ecosystem, such as video e-commerce and mini-programs, has maintained rapid growth, laying a solid foundation for the commercial development of advertising and e-commerce.

For example, in the third quarter of 2023, the total play volume of WeChat video e-commerce increased by over 50% year-on-year, with strong growth in original content play volume; in the second quarter, the monthly active accounts of mini-programs exceeded 1.1 billion. According to public information, the number of WeChat users served daily through enterprise WeChat services has reached 500 million, and WeChat search monthly active users have exceeded 800 million.

In terms of video e-commerce transaction data, rapid growth is also evident. According to participants in the WeChat Open Class, in 2023, the GMV (Gross Merchandise Volume) of video e-commerce live streaming reached three times that of 2022, with a 300% increase in supply quantity, a 244% increase in order quantity, and a GPM (average total amount spent per thousand viewers) exceeding 900 yuan. This data is commonly used to measure the selling ability of live streaming roomsAnalysis shows that video shopping complements the last piece of the puzzle for consumers from browsing to completing transactions, truly realizing the "internal circulation" of completing business within WeChat. Within the WeChat ecosystem, Video Account, Mini Programs, and Enterprise WeChat have built three major transaction platforms for merchant partners, with Video Account handling transactions, Mini Programs managing operations, and Enterprise WeChat focusing on users. As a result, TENCENT has created an "inclusive and comprehensive business ecosystem".

He Di, General Manager of Vertical Industry Ecology at TENCENT Smart Retail, publicly stated that 2024 will be the outbreak period for Video Account. "Video Account will become the enhancement and supplement of the public domain capabilities of Mini Programs within the WeChat ecosystem. The two sides' model will bring more public domain traffic through Video Account, and then use the WeChat ecosystem to retain users in the private domain."

Among TENCENT's various businesses, Video Account is currently the biggest highlight, expected to continue contributing high-quality new revenue to TENCENT's advertising, enterprise services, and payment businesses.

Sealand Securities analysis indicates that the current video account advertising loading rate is relatively restrained in the industry, with significant room for improvement. At the same time, video account e-commerce is still a blue ocean, in a critical period of reaching a large scale, with significant room for improvement in active buyer penetration. In addition, mini-games and short dramas within Mini Programs are also in a rapid development phase, expected to bring incremental elasticity.

In June 2023, the WeChat Mini Games team stated that the number of WeChat Mini Games developers exceeded 300,000, the total number of users exceeded 1 billion, and the monthly active users reached 400 million, setting a historical record. According to TENCENT's 2023 second-quarter earnings conference call, Mini Games contributed a single-digit percentage of revenue to its social networking and online advertising business for the quarter.

In the third quarter of 2023, TENCENT's international game revenue reached 13.3 billion RMB, accounting for 29% of the total game revenue. This high proportion is expected to continue in the fourth quarter, as the international market has become a stable source of revenue for TENCENT's games.

The fourth quarter is usually a low season for game revenue. Market expectations for the fourth quarter of 2023 suggest that TENCENT's overall game revenue level may remain stable. Due to the high base effect of mobile games "Goddess of Victory" and "Phantom Tower" last year, the growth rate of international game revenue may decline. However, based on the performance during the 2024 Spring Festival, TENCENT's "evergreen games" have shown impressive performance in both domestic and international markets. The Spring Festival season usually sets the tone for the game performance for the coming year.

According to Sensor Tower statistics, in January of this year, "Honor of Kings" returned to the top of the global mobile game bestseller list. Data from Qimai shows that the iOS version of "Honor of Kings" had 848,000 downloads from February 8th to February 14th, an increase compared to the same period last month.

Another popular game from TENCENT, "PUBG Mobile," has been performing well overseas. According to Sensor Tower, in 2023, "PUBG MOBILE" ranked second in overseas game revenue, with a 15% month-on-month increase in downloads in January 2024, retaining the top spot in the overseas mobile game download list.

In a deep analysis report, Sensor Tower stated that from 2019 to the present, the cumulative revenue of 82 global mobile games has exceeded $220 billion, maintaining a significant evergreen trend. Among them, TENCENT's "Honor of Kings," "Peace Elite," and 5 other games have been labeled as "evergreen"Mobile games are on the list.

The latest revenue growth data also confirms this. In January this year, Tencent's "CrossFire: Legends", "Peacekeeper Elite", and "Honor of Kings" swept the top three spots in Sensor Tower's global mobile game revenue growth list for January.

Among them, "Peacekeeper Elite" performed beyond expectations in 2023, entering the "tens of millions of daily active users club" and ranking among the top tier of domestic games. During the third-quarter earnings conference call, Tencent's management explicitly mentioned that games like "Peacekeeper Elite", "Area F2", and "Code: Live" could become evergreen titles in the future.

Recently, Tencent's flagship game "Honor of Kings" has made new progress in going global. In February, the overseas version of "Honor of Kings" has landed in 57 countries and regions worldwide, including the Middle East, North Africa, Turkey, the Commonwealth of Independent States, and South Asia. It has surged into the top ten or even top three in the free charts in many places, with the number of pre-registered users surpassing 3 million. At the same time, "Honor of Kings" has announced a partnership with the Esports World Cup (EWC), showing a parallel trend of Tencent Games' esports events and product globalization.

While the team of "evergreen games" continues to grow, in terms of new games, Tencent has nearly 20 reserve products that have obtained licenses in the domestic market. Guosen Securities pointed out that among the new games, "Star of Dreams", "Delta Force", "One Piece: Ambition", "Need for Speed Online Mobile", "Dawn of Stars", and others are worth paying attention to. In order to encourage innovation, Tencent Interactive Entertainment launched the "Spring Shoots Plan" at the beginning of 2024, focusing on the incubation of "small and beautiful" niche games to cope with intense industry competition and market changes.

"Although there have been fluctuations in the short term for 'Star of Dreams', with Tencent Games' rich operational experience, its long-term performance is still worth looking forward to. Overall, Tencent Games has a large user base, and the scale of revenue from multiple evergreen games leads the industry. The fundamentals of Tencent Games remain solid," said an analyst at a brokerage firm in Shanghai