Comprehensive Study of "Ants"? In-Depth Analysis of Tencent Fintech's Second Spring

When it comes to Tencent's consumer loans, the first thing that comes to mind is Weilidai. But we all know that Weilidai actually belongs to WeBank, with Tencent holding only a 30% stake in WeBank. So Weilidai does not fully belong to Tencent in the strictest sense. However, in reality, Tencent has long been planning its own Huabei and Jiebei.

A few days ago, Tencent's WeChat was internally testing a consumer loan product called "Fenqi," which is comparable to Huabei. There is currently no specific plan for its official launch. But this reminded me of Tencent's "Fenfu," which has been targeting a small group of users since 2020. It is also a consumer loan product with very similar features to Huabei.

"Fenfu" has been online for three years and is still only available to a portion of users.

This seems to indicate that with the implementation of fines on Ant Group and Tenpay, internet finance regulation is gradually relaxing. As Tencent's current consumer loan product (note: "Weilidai" belongs to WeBank, and Tencent only receives commission from traffic revenue), "Fenfu" is gradually gaining momentum and may not be far from a full-scale launch.

As a result, I started to ponder these two core questions:

(1) How much money can be made?

With the implementation of fines on Ant Group and Tenpay, the market is starting to anticipate signals of gradual relaxation in internet finance regulation. As Tencent's only self-operated consumer loan product, different from "Weilidai" which belongs to WeBank, if it gradually expands to all users, how much incremental value can it bring to Tencent's fintech business?

(2) How to assess regulatory risks?

Although throughout last year, management responded with confidence that the fintech business is not affected by regulation, if it is necessary to use Ant Group's rectification plan as a template for Tencent's fintech business, what work does Tencent need to do, and what different impacts will different rectification plans have on the listed entity's fundamentals?

This article will focus on Tencent's fintech sector and discuss the above-mentioned questions. The following is the specific content.

I. Basic Introduction before the Questions: A Detailed Look at Tencent's Fintech Business

Before discussing the questions, let's take a detailed look at Tencent's fintech business as a whole.

In the financial report, Tencent has always combined the financial technology and enterprise services businesses when disclosing data. Although these two businesses may be facing the same customers in actual operations, the main services they provide have distinct differences.

1. In the enterprise services business, the main sources of revenue are Tencent Cloud services, Yiche revenue, and the commission revenue from video account e-commerce that started this year.

2. The financial technology services include payments, wealth management, and commission revenue from directing traffic to WeBank, which is the focus of our discussion today.

In the financial field, the first thing to consider is licensing. However, like other major companies, Tencent holds relatively comprehensive licenses. Within the group and its invested and affiliated companies, there are licenses for banking, payment, insurance, securities, fund distribution, microfinance, personal credit reporting, and other businesses. But currently, Tencent has only used two licenses, payment and fund sales, in its self-operated business out of the three businesses (payment, wealth management, and Weilidai). Weilidai itself does not belong to Tencent's self-operated business. Tencent shares its revenue with WeBank through a commission-based model, which can also be seen as selling traffic.

Looking at the entire Jinke business, according to our model, the payment business contributes the most to Jinke's revenue, accounting for nearly 87%. The next is the revenue from directing traffic to Weilidai, accounting for about 10%. The remaining part is wealth management income, such as fund sales, accounting for about 3%.

Now let's briefly discuss the payment and wealth management (fund sales) businesses, and then focus on the topic of credit business in this article.

1. Payment: Currently the pillar, but future growth follows the market

In the payment business, apart from personal payment activities such as sending red envelopes and transferring money, which are free and do not generate revenue, the main sources of revenue are:

1. Credit card repayment and wallet balance withdrawal services for individual users, with rates below 0.1%.

2. Business payment services for B2B merchants, with rates of 0.6% for physical goods and offline payments, and 1% for virtual goods (such as game props). However, due to preferential plans for small and medium-sized merchants (Oasis Plan, Blue Ocean Plan) and inclusive requirements from regulatory authorities, the actual rates are significantly lower than the quoted rates, with an industry-wide comprehensive rate of 0.38%.

According to Dolphin Research's calculations, WeChat Pay's comprehensive rate is likely to be less than 0.3%, and after deducting the portion paid to clearing institutions and acquiring outsourcing service providers, WeChat's actual take rate may be less than 0.2%. (For a detailed analysis of the payment industry chain, please refer to Dolphin Research's previous article "Behind Tencent's 'Chicken Ribs': Ultimately Focusing on Payment!")

From 2020 to 2021, WeChat made some upward adjustments to its payment rates, but after the central bank advocated reducing fees and benefiting small and medium-sized businesses in 2022, WeChat's payment rates stopped rising and remained stable.

Although there is a big gap compared to the 3-5% take rates of global payment giants,

Therefore, the future growth driver for Tencent's payment business is not the increase in take rates, but the expansion of transaction volume. The expansion of transaction volume can be divided into two parts: increasing the penetration rate of online payments to expand the entire third-party payment market, and promoting WeChat Pay to capture more market share in the third-party payment market.

In the past decade, the penetration rate of third-party online payments has been increasing year by year. As of the second quarter of 2023, the number of transactions and the amount processed by non-bank third-party payment institutions accounted for 69% and 7% respectively of the national total.

However, the proportion of Alipay's transaction volume in the overall non-bank institutions has been decreasing year by year. As WeChat Pay includes a large number of red envelope transfers in its statistics, it cannot be directly compared with the payment volume of non-bank institutions (excluding red envelope transfers) disclosed by the central bank to obtain market share. However, if there is no significant change in user behavior, based on the trend of the ratio of Alipay/WeChat Pay transaction volumes, WeChat Pay's proportion of transaction volume should also be declining.

Considering that Alipay and WeChat Pay do not have obvious competitive influences on their monopolistic positions, it can be roughly judged that the average transaction amount of Alipay and WeChat Pay is increasing, indicating that users are gradually using Alipay and WeChat Pay in more high-value consumption scenarios, not just for daily consumption.

However, in terms of daily consumption alone, WeChat Pay has a greater advantage over Alipay. For example, in 2022, due to the longer lockdown period caused by the epidemic and economic pressure, residents' consumption was more focused on daily necessities, resulting in a significant increase in WeChat Pay's transaction volume compared to Alipay.

2. Wealth Management (Fund Sales): No advantage, not a focus

This business is actually a revenue-generating business that extends from payment and transfer functions. After users bind their bank cards to WeChat Pay and receive transfer red envelopes, the idle money left in their wallets can naturally be used to purchase some wealth management products such as funds, and WeChat charges a certain channel fee (1/3 to 1/2 of the fund management fee). In terms of regulation, the wealth management business does not have major loopholes. WeChat actually charges for traffic fees, and the risk compliance of funds is still implemented by banks and fund companies.

Compared to Alipay, WeChat does not have obvious advantages in wealth management business as it does in payment business. This is mainly because Alipay has deep-rooted presence in large-sum fund transfers and consumption scenarios. Due to considerations of fund security, users' mindset has been formed and it is difficult to shake it in a short period of time.

In recent years, the scale of the wealth management business has not been directly disclosed in Tencent's official financial reports. However, based on research information from industry experts, Dolphin Research estimates that the scale of Tencent's wealth management business has reached hundreds of billions of yuan, with self-operated money market funds accounting for the majority. However, in the regulatory rectification, due to the large scale of self-operated funds, Tencent actively reduced the promotion of Tianhong Money Market Fund, which is the Yu'EBao, thereby reducing the scale of funds from 12 trillion yuan at the end of 2020 to the current 670 billion yuan. Although in theory, both Tenpay and Ant Financial have no obvious ceiling on the scale of wealth management through agency sales (the scale of users' wealth management will increase with the growth of disposable income after deducting daily expenses), the overall scale of domestic public funds (27 trillion) is still much lower than the scale of credit (domestic consumer loan balance of 56 trillion), and the part sold through Internet platforms is even smaller.

Dolphin Research believes that on the one hand, this is because banks are still the mainstream channel for fund sales, and on the other hand, it is due to the income level and fund usage habits of Chinese users. It is difficult for residents' wealth management needs to reach the same level as credit and deposits in the short term. In addition, in the current economic pressure and poor performance of the equity market, the growth of wealth management scale will definitely be affected.

However, due to the low take rate of WeChat (Dolphin Research estimates a comprehensive fee rate of about 0.15%), the revenue generated by this business is also very low in the overall financial technology (about 3%). Even if another trillion is added (+30%-50%),

3. Borrowing: "New Hope" for Future 5 Years of Jinke

Currently, Tencent's "borrowing" business is not strictly a credit business, but a fee charged for diverting traffic to Weilidai, a subsidiary of WeBank. It is essentially a channel fee for selling traffic. It's just that the channel fee rate is "slightly higher". The comprehensive annualized interest rate of Weilidai loans generated by WeChat diversion is expected to be 16-18% (the annualized interest rate for general users is 18.25%, interest-free for 30 days, and the annualized interest rate for high-quality customers is 7%-10%). Tencent takes half of it, which means the take rate can reach 8%-9%.

Weilidai belongs to WeBank's consumer loans, but the balance of consumer loans in WeBank's personal loans just exceeded 170 billion in 2022. Assuming that all loan demand generated by WeChat diversion, then at an 8.5% take rate, Tencent's diversion income is about 14.4 billion, accounting for only 8.6% of the total revenue of Jinke and Qifu, and 10% of Jinke's revenue alone.

Compared with Ant Financial's consumer credit balance of 14 trillion at the end of 2022 (Huabei, Jiebei), the gap of Weilidai is indeed not small. However, Dolphin Research believes that it is too difficult to rely solely on the natural growth of Weilidai's scale to catch up with Ant Financial. The core reason is that although WeChat is not short of traffic, it lacks a direct e-commerce consumption scenario. In other words, Weilidai is more inclined towards users actively seeking loans. When users choose a loan channel, their first reaction may not be Weilidai, but rather some low-interest small consumer loans offered by banks.

Therefore, when internal resources are allocated to promote implementation, the demand for credit scenarios within WeChat can be fully tapped.

II. Opportunities for Jinke: "Fenfu" and "Fenqi" - How much incremental revenue can WeChat's version of Huabei and Jiebei bring?

Currently, Tencent has mainly launched two products in its self-operated credit business. Fenfu was initially launched on a small scale in the first half of 2020, and although it has not been fully rolled out yet, the user base that can use it is continuously expanding. Fenqi is still in the gray testing phase, with only a small number of users participating in the testing.

Dolphin Research believes that there are two main reasons for the slow progress of Fenfu:

1. Tightened regulations are definitely the first and foremost reason. In 2020, with the listing of Ant Group and the tightening of regulations on internet finance (especially the credit business of internet platforms), Tencent intentionally slowed down the launch of Fenfu.

2. Secondly, the early source of funds for Fenfu mainly came from Tencent's own small loan companies under Tenpay and Weilidai. However, at that time, they had not yet connected with external banks, so the scale of lending was limited.

But with the implementation of the 7 billion yuan fine on Ant Group and the 3 billion yuan fine on Tenpay in the first half of the year, the three-year tightening of supervision on internet finance is gradually easing. So, benchmarking against Ant Group, after Tencent fully launches Fenfu/Fenqi, how much incremental revenue can it bring to the Jinke business?

1. Changes in Ant Group's lending before and after regulation?

To benchmark against Ant Group, it is necessary to clarify the impact and changes brought by this round of regulation on Ant's credit business. Before the regulation, the prospectus for Ant Group's listing disclosed detailed credit data at that time:

As of the end of 2019, Ant's credit balance was 20.1 trillion yuan (consumer loans + small and micro business loans), accounting for 10% of the total consumer loans and small and micro business loans in China at that time (20.1 trillion / (13+6)).

Out of the 20 trillion yuan loan balance, only 0.04 trillion yuan came from self-operated funds (Ant's small loan registered capital of 12 billion yuan, leveraged 3.3 times as allowed), accounting for 2%. The remaining 98% of credit funds came from external sources - 1.44 trillion yuan from external banks and 0.67 trillion yuan from packaging and issuing ABS with credit assets. In other words, Ant Group, relying solely on a registered capital of 12 billion yuan, released a scale of 20 trillion yuan, which truly stepped on the accelerator of leverage.

And due to the rapid penetration of Alipay's traffic, if not controlled, the future volume will further expand. As a result, not only is it difficult to control credit risks, but traditional financial institutions that have done the same thing are also hindered by their own regulatory requirements, making it difficult to compete fairly with Alipay. Therefore, the regulatory authorities have taken action, as follows:

(1) Credit Version "Disconnection and Direct Connection"

Generally speaking, internet consumer loan businesses involve four parties: a. borrowers (individual users); b. funders (banks, small loan companies, consumer finance companies); c. technology providers (such as Alipay platform for user acquisition and providing user data); d. credit agencies (providing credit scores of borrowers to help credit institutions determine credit limits).

However, in the actual cooperation framework before Ant Group's regulation, Ant Group often sells a group of user loan assets to banks, and the banks appear to conduct independent risk control. However, in reality, the credit scores of this group of users are evaluated by Ant Group, and the banks do not have a clear understanding of the situation of each loan user in the asset package.

In simple terms, Ant Group acts as the funder (a small part), technology provider, and credit score evaluator, taking charge of traffic and credit risks, while the banks become mere funders, but they still bear the majority of repayment risks.

In this situation, Ant Group enjoys many benefits that originally "do not belong" to it:

1. A higher share in the industry chain. If we calculate based on a 15% loan interest rate, deduct 3% for funding costs and 3% for overdue loans, the remaining 9% interest rate is distributed. If it is an assisted loan, Ant Group charges a referral fee of 4-5%. However, if it is a joint loan, Ant Group will take a higher share of the interest rate because the bank purchases a group of user asset packages, and credit risk control is also done by Ant Group.

2. Funders bear the risk of default repayment but do not have complete borrower information. Ant Group keeps the majority of risk control work internally. For banks, the credit demand provided by Ant Group is not complete and transparent for individual borrowers. Instead, it is a group of borrowers' information classified and packaged by Ant Group's own big data credit scoring. It is difficult for banks themselves to verify and track the credit risks of individual borrowers.

3. Mixed operations and intensified monopoly. Originally, the credit business belonged to Alipay. Therefore, there would be a situation of mixed operations of payment and credit. In this way, Ant Group can concentrate the traffic of online consumption scenarios on credit businesses such as Huabei and Jiebei by setting a unique payment method.

Therefore, in response to the above issues, the regulatory authorities require Ant Group to migrate to the newly established consumer finance company (Chongqing Ant Consumer Finance). In addition, for the sources of funds in Huabei and Jiebei, the borrower's information should be separately disclosed (divided into self-owned funds and bank funds). However, because the source of funds for Huabei is required by the regulators to have at least 30% of Ant Group's self-owned funds, the scale of loans that can be issued is limited. For the same user, the credit limit granted by the platform for Huabei is much smaller than the credit purchase limit.

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(2) Financial Leverage "Decrease"

Another issue is the explosive leverage ratio. According to the regulations of the China Banking Regulatory Commission, the capital adequacy ratio requirement for consumer finance and other non-systemic banking institutions is not less than 10.5%, which means a leverage ratio of about 10 times, which is far from the pre-regulation comprehensive leverage ratio of 2 trillion/120 billion = 167 times for Ant Group.

Therefore, in response to the issue of rampant lending, regulatory authorities have made clear rectification requirements for "joint loans" in the "Notice on Further Regulating the Internet Loan Business of Commercial Banks"--

1. Internet loans jointly funded and issued by commercial banks and cooperative institutions,

2. The balance of internet loans jointly funded and issued by commercial banks and all cooperative institutions.

In simple terms, the first item of the above regulations is for the requirements of consumer finance companies, and the second item is for the requirements of banks: regulators allow consumer finance companies to provide "joint loan" services with external sources of funds, but in each joint loan, the proportion of self-operated funds provided by consumer finance companies cannot be less than 30%, and the balance of "joint loans" funded by commercial banks (less than 70%) cannot exceed 50% of the bank's total loans.

Assuming that all of the self-operated funds of the consumer finance company are used for joint loans, under the minimum 30% contribution ratio, the maximum credit scale that can be issued is also about the registered capital, which has shrunk rapidly compared to before the regulation.

Therefore, when the leverage ratio decreases, the gap in the lending scale can only be "partially" compensated by increasing the registered capital. However, supplementing capital is not an easy task. After Ant Group established Chongqing Ant Consumer Finance Company with an initial capital of 8 billion in June 2021, it further increased its capital to 18.5 billion by the end of 2022.

However, Ant Group's personal consumer loan balance has still declined from the peak of 1.9 trillion at the end of 2020 to 1.4 trillion at the end of 2022. Although there are inevitably macroeconomic factors and competition from banks launching low-interest consumer loans, these are still the core reasons for the shrinking lending scale.

Ant Group's consumer loan balance of 1.4 trillion at the end of 2022 accounts for approximately 2.5% of the overall consumer loan balance in China. Considering the high demand for short-term emergency loans such as Huabei and Jiebei, Ant Group's 1.4 trillion consumer loans account for 15% of the national short-term consumer credit balance. With the completion of the 10.5 billion capital increase,

2. How much credit scale can WeChat Pay theoretically/"in practice" undertake? Currently, Tencent does not have a license for a consumer finance company under its umbrella. Its payment business mainly relies on its subsidiary, Caifutong Xiaodai Company (registered in Shenzhen), to carry out the payment services. However, the self-operated capital leverage of the Xiaodai Company is lower than that of consumer finance companies, and the regulations vary in different regions. According to the maximum leverage requirement of 5 times in Shenzhen, Caifutong's registered capital of 10.5 billion can generate self-operated loan assets of 52.5 billion. Then, according to a 30% joint loan-to-capital ratio,

Of course, the gap between Tencent and Ant can also be partially bridged through loan facilitation, but loan facilitation essentially serves as a channel to sell traffic, so the take rate will be lower. From the perspective of stable internal business operations, the proportion of joint loans and loan facilitation on general platforms is usually around 3:7.

If Tencent follows Ant's example and undertakes all credit businesses, it can achieve a higher leverage ratio and release a larger scale of consumer loans. Of course, increasing capital will also further expand the lending space.

However, when discussing payment businesses earlier, we also emphasized a point - although WeChat has more traffic internally and the number of transactions through WeChat Pay is much higher than Alipay, it does not necessarily mean that users within WeChat have more credit demands due to the lack of corresponding consumption scenarios.

Therefore, Dolphin Research believes that Tencent's credit scale can only break through when it integrates transactions with mini-programs and video commerce. In addition, since the beginning of this year, traditional financial institutions such as banks have shown a higher willingness to lend and have launched multiple low-interest consumer loan products (as low as 4%-5% annualized interest rate). Therefore, Fufen's current annualized interest rate of 14.6% does not have a competitive advantage. Therefore, we speculate that before the transaction GMV within WeChat reaches a certain level, Caifutong's credit scale will always be lower than Ant's (17.5 trillion).

3. How much incremental revenue can be generated by conducting credit business?

With an estimated range of the credit scale, the key to calculating revenue lies in estimating the take rate.

Referring to Ant again, from 2017 to 2019, Ant's microloan platform revenue divided by the average balance of credit assets at the beginning and end of the period shows that the comprehensive fee rate stabilizes at around 2.5%. However, considering that Huabei has a maximum interest-free period of 40 days, the actual rate for interest-bearing assets should be higher than 2.5%. According to an estimation by CMB Securities, assuming that the proportion of interest-free in Huabei assets is 50% and the scale ratio of small and micro business loans: Huabei: Jiebei is 2:4:4, the corresponding rate can reach 4-5%.

This comprehensive fee rate of 4-5% is derived from the weighted average of the rates under the three business models of self-operated credit, joint credit, and assisted credit, based on the proportion of credit scale. Although in the industry chain, the pricing of how much interest rates external investors such as banks can receive is mainly determined by Ant Group. However, in general, from the perspective of the parties involved in sharing the cake in the three credit cooperation models, the take rate that Ant Group can obtain is generally ranked from high to low as self-operated > joint credit > assisted credit.

However, at that time, Ant Group's proportion of self-operated credit balance was only 2%, which was too small, and its proportion in joint credit was only 6%, far below the later regulatory requirement that the proportion of investment should not be less than 30%. Therefore, theoretically speaking, after the introduction of regulations, due to the increase in Ant Group's proportion of investment, the comprehensive fee rate based on the overall credit scale should be higher.

The following figure shows the situation of the profit rates that various institutions can obtain as attempted by Dolphin Research. If the proportion of investment is increased to 30% as required, the comprehensive fee rate of corresponding interest-bearing assets can theoretically be increased to 6.2%.

At present, it is uncertain what method Tencent will adopt for future installment payments and installment purchases. However, due to the limitation of the scale of self-operated funds, Dolphin Research judges that it is highly probable that, like Ant Group, most of the credit funds still need to rely on external institutions to provide, that is, adopting the models of joint credit and assisted credit.

If WeChat Pay continues to imitate Ant Group's credit structure: by controlling the proportion of joint credit and assisted credit at around 3/7, it can be roughly assumed that the comprehensive interest-bearing asset rate is about 5.4% (70% of assisted credit rate 5% + 30% of joint credit rate 6.2%). Therefore, it is estimated that the credit scale of 5,750 to 17,500 billion can bring incremental business to Tencent's financial technology.

III. Risks for Tencent: What troubles will be brought to Tencent if it replicates Ant Group's rectification plan in the worst-case scenario?

When predicting the future development of Tencent's credit business, benchmarking Ant Group is not without risks and concerns, mainly focusing on the equity structure of the entire financial technology business and the listed group itself.

As we all know, Ant Group integrates all of Alibaba's financial technology businesses, but Alibaba's listed entity actually only owns 30% of Ant Group's equity, so Ant Group only includes part of the net profit in Alibaba's financial statements in the form of equity income. At present, after the rectification, Ant Group can be said to have obtained a personal credit license to some extent (Qiantang Credit), mainly after all businesses are fully compliant.

1. Before establishing a financial holding company, the asset structure needs to be adjusted

Compared to Tencent, since it is inevitable to establish a financial holding company, the looming issue is to adjust the asset structure to meet the requirements for establishment. Last year, in the article "Ant's Butterfly Effect: Will Meituan and Pinduoduo Be Left Behind?" we focused on discussing the problem faced by Tencent in establishing a financial holding company, which is the issue of the scale of equity investments being too large, that is, one of the requirements for non-financial institutions to establish a financial holding company is that "the balance of equity investments does not exceed 40% of net assets (consolidated financial statements of non-financial enterprises)". ", in simple terms, Tencent is required to have equity investment balance/net assets <= 40%.

In terms of the broad definition of equity investment balance, Tencent has decreased from 803.3 billion in 2021Q3 to 676.1 billion in 2023Q2. And if we look at the narrow definition of equity investment (associates, joint ventures), Tencent has also decreased from 376.3 billion in 2021Q3 to 254.2 billion in 2023Q2.

According to the requirement of 40% of net assets (840.8 billion in 2023Q2), it remains to be seen how the regulatory authorities will define the scope. This is something that needs to be further monitored.

2. Big Financial Holding or Small Financial Holding?

When it comes to establishing a financial holding company, the question arises whether it should be a big financial holding model or a small financial holding model. The big financial holding model refers to the non-financial institution as a whole becoming an independent financial holding company.

Ant Group's initial plan was the "big financial holding" model, but due to the significant presence of non-financial businesses within the group, the approach was changed to the "small financial holding" model. The group established four business segments internally (financial, internet, technology, overseas), with the financial holding company placed under the financial segment, which encompasses all financial businesses including payments.

However, for Tencent, it depends on the situation:

If a financial holding company is established at the group level, it is likely to follow the small financial holding model, even though the financial technology business contributes a significant portion of profits and assets within the entire group. This means that compared to the current business structure, Tencent's main financial statements will not undergo significant changes, and therefore, the valuation will not be affected.

In other words, the financial technology business needs to be packaged into a separate company, such as "Penguin," to compete with "Ant Group." Whether "Penguin" chooses the big financial holding model or the small financial holding model has no impact on Tencent. The core issue is whether Tencent has control over "Penguin."

Although in Tencent's recent quarterly earnings conference calls, the management has shown a relatively positive attitude towards the regulatory risks of establishing a financial holding company and other financial technology businesses, especially after the 3 billion fine imposed on WeChat Pay, the department is seeking more business expansion. However, we do need to have certain expectations regarding the impact of this "worst-case scenario" on valuation.

IV. Opportunities and Risks of Financial Technology and Their Impact on Valuation

In Dolphin Research's valuation model for Tencent, the financial technology segment accounts for 20% of the total valuation (including investments), making it a crucial valuation support. Therefore, if we consider the worst-case scenario for the existing financial technology business, from 100% ownership to 30% equity and the separation of the listed entity's financial statements,

Assuming it is fully launched in the next year and reaches the minimum maturity stage of lending scale of 575 billion within two years, it would directly bring in an incremental revenue of 31 billion. This revenue is already calculated as net revenue, so the actual cost may only include basic operational and depreciation expenses, as well as team personnel salaries, which should be much higher than the comprehensive gross profit margin of the original financial technology and enterprise services, which is 38%, and the profit margin of 25%. According to the situation before 2019, 80% of the costs mainly come from transaction costs, including payment transactions, credit transactions, and the fees paid to clearing institutions and issuing banks for financial transactions, which generally account for 0.1% of the transaction amount. Therefore, Tencent's additional transaction costs of 575 million yuan correspond to a total cost of 720 million yuan if this portion of transaction costs also accounts for 80% of the total cost structure of the credit business, resulting in a gross profit margin of 95%.

In addition, considering that the promotion of credit business is mainly within WeChat, the external advertising expenses will not be significant. Assuming that the expense ratio is 25%, the net profit margin after tax can reach 53%, corresponding to an incremental net profit of 16.4 billion yuan, which can support a valuation of 15 times PE ratio.

Similarly, if the credit scale can reach 1.75 trillion yuan by 2026, the neutral expected valuation can increase to HKD 425 per share, as shown in the figure below.

However, if we consider the impact of adjusting the equity structure, the effect on Tencent's valuation under different scenarios is as follows. From

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