Tencent Holdings' Performance Outlook: Healthy Growth Expected in Q3 for Gaming and Advertising, Unleashing the Value of Business Ecosystem

According to the information obtained from the Zhongtong Finance APP, Tencent Holdings (00700) will announce its 3Q23 earnings report on November 15th. Several securities firms have provided their outlook reports on the company's third-quarter performance. Among them, CITIC Securities predicts that the company's 3Q23 revenue will reach 152.8 billion yuan (YoY +9.1%), and its Non-IFRS net profit will reach 39.4 billion yuan (YoY +22.2%). The business is maintaining a healthy growth trend, with new games and video accounts, as well as the commercial ecosystem of mini-programs contributing to incremental growth. The release of the mixed reality model will also enhance the company's AI layout.

Guohai Securities predicts that Tencent's revenue will reach 155.7 billion yuan, a YoY increase of 11%. At the same time, the net profit under non-international financial reporting standards is expected to reach 41 billion yuan, a YoY increase of 27%.

Lyon expects Tencent to have a robust performance in the third quarter, with total revenue increasing by 11.2% YoY to 155.8 billion yuan, and adjusted pre-tax profit increasing by 21.5% to 50 billion yuan.

Morgan Stanley predicts that Tencent's third-quarter revenue and non-GAAP operating profit will increase by 11% and 24% YoY, respectively. The bank points out that the recovery of the group's gaming business and continued growth in advertising provide positive operating leverage and profit expansion for the company. Due to the recovery of high-profit businesses such as games and video accounts (VA), the bank is more optimistic about the group's profit growth, and previous cost-cutting measures are expected to have more practical impact in the second half of the year.

CMB International predicts that Tencent's total revenue/adjusted net profit for 3Q23 will increase by 10%/26% YoY to 153.5/40.6 billion yuan. It is expected that gaming/advertising/FBS revenue for 3Q23 will increase by 7/23/12% YoY. Benefiting from the improvement in operating leverage of the consumer internet business, the bank believes that Tencent can continue to achieve steady and profitable growth in an uncertain macro environment.

Citigroup estimates that the company's earnings and profit margin will slightly exceed market expectations, with revenue roughly in line with expectations. Game growth is relatively slow, but it is partially offset by the growth in advertising revenue. It is expected that the company's third-quarter revenue will increase by 9.8% YoY to 153.9 billion yuan, and non-GAAP net profit will increase by 15.4% YoY to 37.2 billion yuan, with a profit margin of 24.2%.

It is expected that the game business will rebound, while the social networking business will face pressure.

CITIC Securities points out that the company's game business is expected to generate revenue of 46.8 billion yuan in 3Q23 (YoY +9.2%), with domestic game revenue reaching 33.4 billion yuan (YoY +7.0%) and overseas game revenue reaching 13.5 billion yuan (YoY +15.0%). Guohai Securities predicts that the revenue for the third quarter of 2023 will increase by 8% YoY, with stable performance in the domestic core game market and the potential contribution of mini-program games to marginal revenue. New games will be launched in both PC and mobile games this quarter. Lyon also points out that as the monetization of the company's new popular games accelerates, game revenue may increase by 8.9% YoY, which will drive the growth of the group's game revenue in the fourth quarter. Citi expects Tencent's online gaming revenue in the third quarter to increase by 6.2% YoY to RMB 45.5 billion, with domestic gaming revenue up 4%.

Specifically, with the launch of new games such as "Fearless Contract," "Arknights," "MapleStory: Legend of Maple," and "High Energy Heroes" during the summer vacation, as well as the release of more commercial content, key overseas games such as "Valorant" are expected to maintain strong performance. It is predicted that the company's gaming business will accelerate its recovery in the second half of the year. The upcoming key game reserves include "Star of Dreams," "Rhythm Fantasy," and "Dawn of the Stars."

CITIC Securities also pointed out that it is expected that the company's social networking revenue in 3Q23 will be RMB 29.2 billion (YoY -2.0%), mainly due to Tencent Music and Huya's proactive adjustment of their live streaming business. This may bring some short-term performance pressure but will contribute to sustained and healthy operations in the medium and long term under the compliance framework. In addition, strong growth in mini-game and music membership subscriptions is expected to offset some of the negative impacts.

Double-digit growth in financial technology is possible

CITIC Securities predicts that the company's revenue from financial technology and enterprise services in 3Q23 will be RMB 49.3 billion (YoY +10.1%, MoM +1.4%). With the implementation and completion of penalties and rectifications for WeChat Pay, the company is exploring consumer loans, wealth management, online insurance, and other products within the compliance framework, which still have significant room for growth. Enterprise services will benefit from the revenue generated by video-based live-streaming e-commerce transactions and the growth of cloud services. On September 7, 2023, Tencent held the Global Digital Ecology Conference, where it released the Tencent Metaverse model and introduced the latest progress in empowering industry digitalization. With the gradual commercialization of SaaS products, product innovation brought by the wave of artificial intelligence, and business growth, the enterprise services business is expected to usher in new opportunities for growth.

Guohai Securities predicts a 14% YoY increase in revenue for the third quarter of 2023. The growth of offline and online commercial payment activities is expected to drive the growth of payment business. Following the launch of "Fenfu," Tencent's consumer finance product "Fenqi" has entered a small-scale gray test. Tencent Cloud has upgraded its MaaS (Model as a Service) and will further expand the Tencent Cloud Industry Model Selected Store, providing stronger technical support and solutions for enterprise customers.

Guohai Securities also stated that the performance of cloud and other enterprise services is worth noting. Since Tencent released the Tencent Cloud MaaS service solution for B-end customers on June 19, Tencent announced upgrades to MaaS capabilities in terms of technical foundation, platform capabilities, and intelligent applications at the Tencent Global Digital Ecology Conference on September 7, 2023.

Positive outlook for advertising revenue growth, with multiple securities firms expecting growth of over 20%

CITIC Securities predicts that the company's advertising revenue in 3Q23 will be RMB 26.4 billion (YoY +23.0%, MoM +5.5%). Factors such as the commercialization of video-based content, advertising in mini-games, and improvements in advertising technology will continue to drive high growth. In September 2023, Tencent Advertising and Alibaba's Alimama announced an upgraded partnership. Following the support for direct access to Taobao APP during the 618 period, advertising on WeChat Video Accounts, Moments, and Mini Programs can now be fully integrated with Taobao and Tmall landing pages. This is expected to drive growth in advertising revenue and improve the commercial ecosystem. Guohai Securities predicts that the advertising revenue of the third quarter of 2023 will increase by 23% YoY, mainly due to the significant increase in revenue from video and mini-program advertisements. The annual advertising revenue of video is expected to exceed 13 billion. The application of the mixed-element model in Tencent's advertising delivery system has improved recommendation accuracy and conversion rates. By taking advantage of hot events such as Qixi Festival and Asian Games, WeChat has launched innovative advertising products to help brands achieve promotional effectiveness.

At the same time, Tencent has improved the efficiency of advertising delivery through the combination of advertising system and AI. On September 7, 2023, Tencent's mixed-element model officially debuted, supporting intelligent advertising material creation and providing advertisers with a "what you see is what you get" creative experience. The intelligent shopping guide function helps advertisers achieve marketing efficiency.

According to a research report released by Lyon, due to the strong growth of video account traffic and continuous advertising technology upgrades, Tencent's advertising revenue is expected to maintain a high YoY growth of over 20%.

Citigroup predicts that the company's advertising revenue in the third quarter of 2023 will increase by 21.4%, with media advertising increasing by 12.7% and social platforms and other advertising increasing by 22.6%.