Tencent Holdings Limited Second Quarter Performance Outlook: Games expected to achieve sequential growth over multiple quarters

According to the financial news app Zhitong Finance, Tencent Holdings (00700) will release its second quarter 2024 results on August 14th. For this quarter's financial report, the market is mainly focused on the growth of the gaming business, the monetization performance and outlook of the advertising business under the rise of Video Number. Institutions generally predict that Tencent's gaming business is showing strong growth momentum, achieving good results in both domestic and international gaming markets, and is expected to achieve quarter-on-quarter growth over multiple quarters. This positive trend is expected to significantly increase market expectations for its profit growth.

Looking at the overall performance, institutions generally expect Tencent to maintain a high-quality growth trend this year. Guohai Securities predicts that Tencent's second quarter operating income will increase by 9% year-on-year to 163 billion yuan, NON-IFRS net profit attributable to equity holders will increase by 34% year-on-year to 50.4 billion yuan, gross profit will increase by 18% year-on-year to 83.4 billion yuan, and the gross profit margin will remain at a high level of 51%.

TF Securities estimates that Tencent's 2Q24 revenue will increase by 8% year-on-year, with growth picking up compared to 1Q2024. Game growth is starting to recover, advertising continues to maintain high year-on-year growth, and FBS revenue growth rate has declined quarter-on-quarter. It is expected that the overall gross profit for 2Q2024 will be approximately 85 billion yuan, an increase of 20% year-on-year; the overall gross profit margin will be 52.5%, an increase of 5.1 percentage points year-on-year, and relatively stable quarter-on-quarter. Non-IFRS net profit attributable to equity holders is expected to increase by 36% year-on-year.

In terms of the gaming business, the successful launch of "Dungeon & Fighter: Origin" in the domestic gaming market has been a key driver. Since its launch on May 21st, the game has held the top spot on the iOS bestseller list for 63 days, indicating that it will significantly contribute to Tencent's domestic gaming revenue. Meanwhile, Tencent's another flagship FPS game "Rainbow Six" was recently approved. Since its first release in 1998, this series has always been one of the top products in the global FPS gaming market.

Furthermore, Tencent's international gaming market has also performed well. The continued hot sales of "Brawl Stars" have led to a 34% year-on-year increase in Tencent's international gaming revenue in Q1 2024, and its ranking on the iOS bestseller list in major markets has further improved since April compared to Q1. In addition, with the global launch of Supercell's new game "Squad Busters," considering the deferred revenue cycle of international games, it is expected that international gaming revenue will also see quarter-on-quarter growth for several quarters.

TF Securities estimates that Tencent's online game revenue in 1Q2024 will increase by 10.5% year-on-year, with domestic market revenue up by 9.6% year-on-year and overseas market revenue up by 13% year-on-year. Looking ahead, TF Securities predicts that Tencent's gaming business revenue will enter a period of accelerating quarter-on-quarter growth for several consecutive quarters, which is expected to drive market profit growth expectations and continuously strengthen risk appetite.

Within the WeChat ecosystem, Video Number is undoubtedly the biggest highlight in recent years, with Video Number ads directly driving the counter-trend growth of Tencent's advertising revenue. The market expects Tencent's advertising to maintain a year-on-year growth rate of around 20% in the second quarter, outperforming not only the internet advertising industry growth rate but also Tencent's other business segments, with revenue potentially reaching a new high of 30 billion yuan for the quarterGuohai Securities predicts that in the second quarter of this year, the advertising revenue of Video Number may hit a new high for a single quarter, becoming the second largest source of advertising revenue after Moments. In addition, in the second quarter of this year, Mini Program advertising benefited from the placement of mini-games and short drama ads, maintaining strong year-on-year growth, with a growth rate of over 30%.

TF Securities, on the other hand, forecasts that Tencent's 2Q2024 advertising revenue will increase by 19% year-on-year and by 12% quarter-on-quarter, mainly due to the continued healthy growth of Video Number traffic, orderly expansion of advertising, and improved advertising effectiveness through AI technology platforms. It is expected that the gross profit margin of the advertising business in 2Q2024 will increase to 57.3%, mainly due to the peak season for e-commerce in the second quarter, with the proportion of high-margin Video Number ads expected to further increase.

In terms of financial technology and enterprise services, TF Securities predicts that Tencent's 2Q2024 financial technology and enterprise services revenue will increase by 6% year-on-year, with a slightly lower growth rate compared to 1Q2024. It is expected that the growth rate of financial technology service revenue in 2Q2024 will fall to a low single-digit level. The company's gross profit margin for financial technology and enterprise services has continued to increase from 27.1% in 4Q2021 to 45.6% in 1Q2024, driven by the recovery of operating leverage driven by macroeconomic demand, the restructuring of cloud business driving margin improvement, and the rapid development of service fees for Video Number live streaming technology