TENCENT has no surprises? The stock king's golden quality cannot be hidden

Hello everyone, I am Dolphin Analyst!

After the Hong Kong stock market closed on May 17th Beijing time, Tencent (700.HK) released its Q1 2023 financial report.

Overall, at first glance, it seems that the Goose Factory's profits are lower than expected, but after a closer look, the stock king is still as stable as ever, and the profit released by the efficiency improvement is actually considerable and exceeds expectations:

1. Let's first look at the effect of the operating leverage release. The Q1 Non-IFRS net profit attributable to the parent company was 32.5 billion, a year-on-year increase of 28%, which is significantly higher than the year-on-year growth rate of revenue of 11%.

Although the final adjusted net profit was 700 million less than expected, the main reason for the expectation gap was the sharp increase in taxes and fees. If calculated based on the usual effective tax rate level (~18%), taxes and fees can be reduced by nearly 5 billion. If the impact of taxes and fees is excluded, the pre-tax profit and operating profit of the core main business alone are both beyond expectations.

Of course, the efficiency improvement here is not only due to layoffs, but also due to the integration of business and the reduction of inefficient projects, which are the main reasons for reducing expenses. But the most crucial thing is the business's return to growth.

2. Total revenue of 150 billion exceeded expectations, and games made a significant contribution

(1) Tencent's game "King of Glory" returned and carried the group's growth banner. Although the market has some expectations for games such as "King of Glory" and "Jin Chan Chan Battle" to create record-high revenue, the actual revenue is still amazing. In the first quarter, the revenue of the domestic game market increased by 6% year-on-year, setting a new historical high. Although the overseas game market has slightly declined on a month-on-month basis, it still has a high year-on-year growth rate of 25%.

In addition, the deferred revenue in the first quarter also increased by 18% month-on-month, and the revenue for the quarter calculated from this increased by 15% year-on-year, also setting a new quarterly high.

(2) The trend of advertising repair and expansion remains unchanged, and short-term expectations should not be too high. In the first quarter, advertising revenue increased by 16.5% year-on-year, reaching 21 billion. Although the market originally had higher expectations, after all, there was a 15% growth in the fourth quarter of last year, and since the beginning of this year, the recognition of video accounts by advertisers has also been frequently reported. Therefore, although the guidance given by the company at the previous quarterly report conference call was only 15%, the market has been continuously raising expectations in the past month, resulting in a 2% gap between the actual revenue and the expected revenue.

But Dolphin Analyst believes that, looking at Tencent itself, the growth rate in the first quarter is not bad. On the one hand, the super-high growth rate in the previous quarter was driven by the short-term explosion of mini-game advertising, which cannot represent the real repair rhythm; on the other hand, although video accounts can increase advertising inventory, the eCPM of video accounts is obviously higher than that of peers' short videos, and the first quarter is still in the early stage of economic recovery and the off-season of the Spring Festival, so most small and medium-sized businesses will still prefer platforms with higher cost-effectiveness or live e-commerce platforms closer to the transaction link.(3) Jinke's business is expected to recover as planned, and the cloud business is still adjusting, but the impact is shrinking rapidly, with a year-on-year growth of 14% in the first quarter, exceeding market expectations. As the epidemic is lifted and offline activities resume, the transaction scenarios of WeChat Pay will naturally return. Although the cloud business has not yet fully adjusted, according to Dolphin Analyst's estimate, it has accelerated to the end.

4. A collective cost reduction and efficiency improvement has finally been achieved by TENCENT's invested brother companies. There was no large-scale disposal of investment assets in the first quarter, so other income has significantly declined. But one bright spot is that the share of income from joint ventures/associates has officially turned losses around after two years. This change reflects that TENCENT's investment companies, and even the entire Internet industry, have already embarked on the path of cost reduction and efficiency improvement.

Detailed comparison of specific indicators and market expectations are as follows:

Dolphin Analyst's Viewpoint

Dolphin Analyst has been talking about the trend of TENCENT's fundamentals for several quarters. Under such expectations, the market has begun to hope for more surprises.

Dolphin Analyst believes that regardless of whether the speed and amplitude of revenue expansion can continue to beat market expectations, in terms of profit release, there is still room for TENCENT to further improve its efficiency based on normal levels in previous years. Moreover, under its own business cycle, the profit that can be leveraged is even higher.

For TENCENT this year, Dolphin Analyst believes that there is no need to be overly concerned about the fluctuations in short-term performance, especially whether the adjusted profits exceed expectations. After all, large companies like TENCENT, which earn money from multiple businesses, are more easily operated. Therefore, Dolphin Analyst recommends focusing more on the revenue side, especially the sustainability of TENCENT's growth flywheel in the medium and long term.

From Dolphin Analyst's perspective, at least from its own operational perspective, TENCENT's growth flywheel is clear, and the moat is wide enough. As a shareholder, one only needs to wait patiently for the value return after the logic is continuously realized.

Detailed interpretation of this financial report:

I. User ecology: WeChat growth rate slows down, and QQ traffic rebounds

In the first quarter, WeChat remained stable, with a net increase of 6 million users in a single quarter, but the growth rate compared to the previous period has slowed down, perhaps indicating the approaching ceiling. The monthly active users reached 1.319 billion as of the end of March.

From third-party data, the growth rate of total user time spent on WeChat has significantly slowed down. In addition to the possibility of users reaching their peak, the hot spring festival and offline travel at the beginning of the year meant that WeChat was used more for work and study, and its activity naturally declined.

However, QQ performed well again in the first quarter. It was originally thought that the platform's aging could hardly be reversed, but since the launch of Super QQ Show in the second half of last year and the continuous improvement of new functions, QQ's traffic has not only stabilized temporarily, but also has sustained a return flow.

II. Games: Spring is Coming

In the first quarter, the revenue of online games was 48.3 billion yuan, a year-on-year increase of 11%, of which the domestic game market increased by 6% year-on-year, the overseas market increased by 25% year-on-year, and the overseas game revenue accounted for 27%. Whether it is domestic or overseas, it has returned to the trend of accelerated growth.

Compared with the industry's 15% year-on-year decline, TENCENT games in the first quarter relied more on their own product strength to go through their own repair cycle. Among them, the domestic market relies on "King of Glory", "CrossFire", "Golden Shovel Battle" and the newly launched mobile game "Dark Zone Breakthrough", and the overseas market relies on "DNF", "Goddess of Victory" and "Valorant", jointly supporting TENCENT games in the spring.

For TENCENT's game reserves, Dolphin Analyst is also confident. At the 515 game conference a few days ago, multiple games are expected to be launched or undergo important tests around June.

Although the consumption heat of the overall overseas mobile game market has been rapidly declining since the second half of last year, in recent months, the industry has been able to see some signs of bottoming out and rebounding. Therefore, in the industry, the drag on TENCENT games will gradually decrease in the future.

From the perspective of deferred revenue and revenue, the cold winter is over and the warm spring is approaching. Short-term deferred revenue in the first quarter reached 97.1 billion yuan, a year-on-year increase, but a quarter-on-quarter increase of 18%.

III. Advertising: Don't magnify the impact of short-term fluctuations, the trend is certain

In the first quarter, advertising revenue was 21 billion yuan, a year-on-year increase of 16.5%. Although it did not exceed market expectations as expected, this growth rate is not bad. In the first quarter, advertising revenue was not divided into social advertising and media advertising, but from the situation of TENCENT Music and TENCENT Video, social advertising is probably still eye-catching in the first quarter, and media advertising is slightly lower.

Last quarter, the market was too pessimistic. After TENCENT easily exceeded expectations, although the management gave relatively clear guidance, investment banks have gradually raised their advertising revenue expectations in the past month as good news about video ads has been frequent this year.

However, the large excess of the previous quarter is closely related to the explosion of small program game ads (such as "Sheep Game"), and there is a certain degree of short-term one-time impact.

Therefore, the growth rate in the first quarter reflects a normal repair situation, which is actually higher than the company's initial guidance, and the trend of quarter-on-quarter improvement still exists, which is obviously better than the situation of declining quarter-on-quarter growth rate in the industry.

And the latest research data in April shows that TENCENT's advertising performance is still good, because Dolphin Analyst believes that there is no need to care too much about short-term fluctuations.

Behind the high growth of TENCENT's advertising, it is related to the recent internal competition of e-commerce platforms and the willingness to penetrate brands into more high-quality traffic. For example, the recent marketing cooperation between Taobao and TENCENT WeChat ecosystem is underway.

Of course, the most important thing is that the commercialization of video accounts has been so smooth, which to a certain extent reflects the recognition of merchants for the value of video accounts, small programs, and the entire TENCENT ecosystem. Even the problem of TENCENT's internal advertising erosion that the market was worried about before does not seem to be as serious as imagined. The recognition of the commercial value of channels by merchants indicates that TENCENT's traffic base is very stable, and the "initiative" of merchants can also make it easier for subsequent video accounts to promote other businesses, such as e-commerce.

IV. Jinke and Cloud: WeChat Pay still dominates the offline payment scene, and cloud business adjustments are coming to an end.Although there was a high incidence of the epidemic in the first quarter, offline activities have indeed resumed, which has led to the return of offline payment scenarios.

First, let's look at the industry. From the reserve funds paid by payment institutions to the central bank, it can be seen that the first quarter has clearly rebounded, with a year-on-year growth rate of 16.7%. Therefore, if we benchmark the revenue situation of Kingsoft according to the slightly higher level of the industry, it can be calculated that enterprise services have already declined by a low single-digit percentage, indicating that the adjustment of cloud services has entered the final stage. This is faster than the company's expected recovery growth next year, and it exceeds the expectations of Dolphin Analyst. It is very likely that we will see growth return in the second half of the year.

In the first quarter, Kingsoft's overall revenue from cloud and internet services increased by 14% year-on-year, reaching 48.6 billion yuan, higher than the market's consensus expectations.

V. Investment income: Joint venture companies achieved profitability, which is a cost-saving and efficiency-increasing trend in the entire industry

There were no large-scale disposals of investment assets in the first quarter, so other income fell significantly. But one bright spot is that the share of income from joint ventures/associates has officially turned around after two years of losses. This change reflects that TENCENT's investment companies, and even the entire Internet industry, have already embarked on the path of cost-saving and efficiency-increasing.

VI. Cost-saving and efficiency-increasing measures are beginning to show results, and there is still room for profit optimization.

Finally, let's look at the profit situation. In the first quarter, promotion expenses continued to decrease year-on-year, which has been the main item of expense optimization for five consecutive quarters. In addition, there was a significant decrease in server depreciation and total employee compensation after layoffs in the first quarter.

In terms of gross profit margin, there were significant improvements both year-on-year and quarter-on-quarter. Looking at the gross profit margin of each business in more detail, there were varying degrees of improvement or repair. Among them, value-added services repaired 3pct year-on-year, Jinke business gross profit margin reached a new high, while advertising gross profit margin fell seasonally.

In addition, the operating profit margin of the core main business (excluding investment income) increased by 5pct quarter-on-quarter and 8pct year-on-year, but there is still room for improvement compared to normal levels in previous years. The absolute value increased by 63% year-on-year.

Of course, if we adjust the profit according to TENCENT's official method - that is, adding the profit and loss of joint ventures/associates, as well as other non-core income such as interest income, while excluding investment income, impairment provisions and changes in amortization of intangible assets that affect Non-IFRS net profit attributable to shareholders, the first quarter increased by 27% year-on-year to 32.5 billion, which is 700 million less than the market expectation of 332.

The reason for the large difference between the main business profit and Non-IFRS performance is due to the one-time adjustment of deferred income tax increase confirmed by overseas companies under the group, which resulted in a tax expense for the final group that was 5 billion higher than the normal tax rate.

Dolphin "TENCENT Holdings" related articles:

Financial report season (last year)

March 22, 2023 conference call "Beyond the main business, TENCENT looks to live streaming e-commerce and AI (4Q22 conference call summary)"

March 22, 2023 financial report review "TENCENT: Are Chinese concept stocks collapsing one after another? The stock king sits firmly on the home court"2022 November 17 Telephone Meeting "TENCENT: Video Number Monetization Progress Smooth, Game Version Number Expected to be Issued Soon (3Q22 Telephone Meeting Summary)"

2022 November 16 Financial Report Review "TENCENT: WeChat Gold Mine is Close at Hand, It's Not Difficult for the Stock King to Make Money"

2022 August 18 Telephone Meeting "Cost Reduction and Efficiency Enhancement Will Continue in the Second Half of the Year, and Video Number is Expected to Have High Expectations (TENCENT 2Q22 Telephone Meeting Summary)"

2022 August 17 Financial Report Review "360-degree No Dead Angle to Dismantle TENCENT: Is It Really That Bad?"

2022 May 18 Telephone Meeting "This Year's Growth Guidance Depends on the Epidemic Situation (TENCENT Telephone Meeting)"

2022 May 18 Financial Report Review "TENCENT: The Stock King is Still Crossing the Tribulation"

2022 March 23 Telephone Meeting "Under the Industry Slowdown, High-quality and Healthy Growth Comes First (TENCENT Telephone Meeting Summary)"

2022 March 23 Financial Report Review "TENCENT: The Stock King Still "Squats"? The Moment of Testing Faith Has Come"

Depth

2023 January 6 "Pan-Entertainment "Opening Red", TENCENT, B Station, Whose Rebound is More Sustainable?"

2022 September 28 "Regaining TENCENT, Exploring the "Bottom" of Tantan Stock King"

2022 January 5 "Is "Little TENCENT" Scaring TENCENT's Little Brothers? The Significance of This Matter is Different for Sea"On June 28, 2021, "Behind the 'Chicken Ribs' of TENCENT: Ultimately Targeting Payment! | Dolphin Analyst" was published.

On June 20, 2021, "TENCENT's Next Stop: Trillion-Dollar Market Value? (Part II) | Dolphin Analyst" was published.

On June 10, 2021, "TENCENT's Next Stop: Trillion-Dollar Market Value? | Dolphin Analyst" was published.

On May 19, 2021, "Can TENCENT Withstand the Pressure After the New Round of Regulatory Changes? | Giant Preview" was published.

On May 5, 2021, "Traffic Property Rights War: Merchants Enter the Game, TENCENT is Pleased | Research Summary" was published.

Hot Topics

On January 17, 2022, "The Butterfly Effect of Ant Group: Will TENCENT Leave Meituan and Pinduoduo Behind?" was published.

On January 12, 2022, "Revisiting the 'Half-Life' Value of TENCENT's Divestitures" was published.

On December 23, 2021, "TENCENT Says Goodbye to JD.com: Happy Breakup or Painful Separation?" was published.

On December 14, 2021, "They Say Regulatory Changes Have Reached a Turning Point, Has TENCENT's Stock Price Bottomed Out?" was published.

Risk Disclosure and Disclaimer for this Article: Dolphin Analyst Disclaimer and General Disclosure