Earnings Preview | TENCENT Expected to Continue Recovery in Q1, All Businesses Return to High Growth

TENCENT is expected to announce its performance on May 17th. Bloomberg estimates that its adjusted net profit will be RMB 32.5 billion, a year-on-year increase of 27%, and its revenue will increase by 8% to RMB 145.6 billion.

TF Securities stated that TENCENT's social traffic and core business competition are stable, and the results of cost reduction and efficiency improvement are obvious. The mid-term fundamentals are based on a solid foundation for high growth. The game supply is relatively sufficient, and heavyweight new works are worth looking forward to in the future. Video Number provides strong support for WeChat traffic and advertising growth, and live streaming e-commerce has potential. Financial technology and enterprise services are expected to gradually recover growth momentum. In the medium and long term, AI technology may become an important growth multiplier for TENCENT.

Q1 Financial Forecast

Zheshang Securities stated that it is expected that TENCENT's Q1 revenue will reach RMB 148.3 billion, a year-on-year increase of 9.46%, a month-on-month increase of 2.30%, which is 1.94% higher than the consensus expectation.

It is expected that TENCENT's Q1 net profit (Non-GAAP) will be RMB 34.4 billion, a year-on-year increase of 34.5%, a month-on-month increase of 15.6%, which is 4.94% higher than the consensus expectation. The net profit margin (Non-GAAP) is 23.2%, a year-on-year increase of 4.31pct, a month-on-month increase of 2.67pct, which is 0.66pct higher than the consensus expectation. This is mainly due to the cost control effect exceeding expectations, and the overall gross profit margin is slightly lower than the consensus expectation due to changes in revenue structure.

TF Securities predicts that TENCENT's Q1 revenue will be approximately RMB 147.3 billion, a year-on-year increase of +8.7%. The revenue growth rate of games and FBS businesses rebounded, and advertising revenue growth continued to accelerate.

TF Securities predicts that TENCENT's Q1 comprehensive gross profit margin will be approximately 43.8%, a year-on-year and month-on-month increase.

It is expected that the Non-IFRS net profit attributable to the parent company in 1Q2023 will be approximately RMB 33 billion, a year-on-year increase of 29%; the Non-IFRS net profit margin attributable to the parent company will be approximately 22.4%, a year-on-year and month-on-month increase.

Sub-business Forecast

Huatai Securities stated that it is expected that TENCENT will usher in a period of accelerated growth in all businesses this year. In Q1, the head games will accelerate commercialization, and the reserve of new games will reach a five-year peak. Video Number will help brand advertising to recover, and offline payments and consumer loans will promote the growth of financial technology, driving revenue to rise across the board.

Online games:

TF Securities predicts that TENCENT's Q1 online game revenue will increase by 6% year-on-year, and the newly launched "Metal Slug: Awakening" has performed well. Domestic game revenue is expected to increase by 5% year-on-year, and overseas game revenue is expected to increase by 10% year-on-year.

Huatai Securities predicts that TENCENT's Q1 game revenue will increase by 5% year-on-year, and the high growth of deferred revenue of "Honor of Kings" will provide a good foundation for Q2 and Q3.

Advertising business:

Huatai Securities predicts that TENCENT's Q1 online advertising revenue will increase by 19% year-on-year, and the gross profit margin will increase by 6pp year-on-year. Tianfeng Securities expects TENCENT's Q1 advertising revenue to increase by 19% YoY (15% YoY in 4Q22), with social and other advertising revenue increasing by 22% YoY and media advertising revenue remaining flat YoY.

Financial technology and enterprise services:

Tianfeng Securities expects Q1 TENCENT financial technology and enterprise services revenue to increase by 13% YoY (-1% YoY in 4Q22).

Zhejiang Securities estimates that the revenue of Jinke Enterprise Services in Q1 may reach 47.5 billion yuan, a YoY increase of 11.2% and a MoM increase of 0.62%, which is lower than the consensus expectation of 0.14%.

Investment advice

Tianfeng Securities stated that TENCENT's 12-month Bloomberg forward PE is 1.6 standard deviations below the median since 2013, and the 12-month Bloomberg forward PE of NASDAQ Composite Index is 1.7 standard deviations below the median since 2013, and the valuation is at a historically low level. Maintain target price of HKD 476 and "buy" rating.

Zhejiang Securities stated that TENCENT is given a 25x valuation for 2023, corresponding to a target market value of RMB 3,908.5 billion (approximately HKD 444.15 billion), and a corresponding stock price of HKD 463, maintaining a "buy" rating.

Huatai Securities, based on SOTP valuation, raised the target price from HKD 416.2 to HKD 440 and maintained a "buy" rating.