Looking Ahead | Will TENCENT's Core Gaming Business Lead the Way as Advertising and Cloud Services Grow Quarter by Quarter?

Hong Kong stock internet giant, financial report week is coming!

On Wednesday, May 17th, TENCENT will release its first quarter 2023 results.

Zheshang Securities predicts that TENCENT will achieve revenue of RMB 148.3 billion in the quarter, a year-on-year increase of 9.46% and a quarter-on-quarter increase of 2.30%, which is 1.94% higher than the consensus expectation. It is optimistic about the cost reduction and efficiency improvement effect, but the increase in the proportion of low-gross-margin business offsets the cost control gains. It is expected that the net profit (Non-GAAP) for the quarter will be RMB 34.4 billion, a year-on-year increase of 34.5% and a quarter-on-quarter increase of 15.6%, which is 4.94% higher than the consensus expectation.

The above investment banks also maintain a "buy" rating on TENCENT and give a target price of HKD 463. If calculated based on the latest closing price, this price means that there is still 36% room for growth!

However, the market is still concerned about how TENCENT's various businesses are recovering.

Games: Increase the commercialization of stock games, and new games may seize the summer window

It is expected that TENCENT's game business will achieve revenue of RMB 47.6 billion in the quarter, a year-on-year increase of 9.00% and a quarter-on-quarter increase of 13.7%, which is 3.60% higher than the consensus expectation.

Among them, mobile games achieved revenue of RMB 34.9 billion, a year-on-year increase of 10.8% and a quarter-on-quarter increase of 15.2%; PC games achieved revenue of RMB 12.6 billion, a year-on-year increase of 4.50% and a quarter-on-quarter increase of 9.95%.

The main reason why the first quarter game business revenue exceeded expectations is: the commercialization of "King of Glory" exceeded expectations, and the activity level during the 2023 Spring Festival far exceeded that of 2022. The company disclosed that it achieved the best Spring Festival performance ever, and there was no impact from the high base period of the same period.

According to Zheshang Securities' calculations, TENCENT's game revenue in the second quarter is expected to increase by 9.48% year-on-year to RMB 46.5 billion. The second quarter revenue still mainly depends on the contribution of stock games, and new games are gradually being launched and are in the stage of word-of-mouth fermentation and revenue climbing. Games such as "Fearless Contract" and "Arknights" that have obtained the version number are expected to gradually go online and contribute incremental revenue.

Social Network: The hot IP at the beginning of the year opens the supply side, promotes new user acquisition and payment

It is expected that TENCENT's social network business will achieve revenue of RMB 29.6 billion in the quarter, a year-on-year increase of 1.85% and a quarter-on-quarter increase of 14.4%, which is 0.48% higher than the consensus expectation.

It is expected that the revenue of social networks in the second quarter will increase by 5.01% year-on-year, mainly due to high-quality content such as "The Three-Body Problem" promoting TENCENT Video's member payment. According to Qimai data, during the broadcast period of "The Three-Body Problem", TENCENT Video gained an average of 3.72 million incremental users per day.

Advertising: External improvement plus operational optimization, and advertisers' willingness to invest has significantly recovered.

Expected TENCENT Q1 advertising revenue is expected to reach RMB 21.5 billion, a year-on-year increase of 19.5%, a month-on-month decrease of 12.9%, and 0.92% higher than expected.

Among them, media advertising revenue reached RMB 2.4 billion, a year-on-year increase of 2.67%, and a month-on-month decrease of 29.0%; social advertising revenue reached RMB 19.1 billion, a year-on-year increase of 21.8%, and a month-on-month decrease of 10.3%.

The reason for exceeding expectations is: 1) The consumption data of video accounts has grown rapidly. According to the Q4 financial report, the usage time of video accounts is three times that of the same period last year. Successfully using live events to gain more user awareness, 190 million users watched the video account 2023 Spring Festival Gala live broadcast, and the channel influence deepening process exceeded expectations, and the monetization chain and tools continue to improve, which can effectively improve the efficiency of advertising delivery; 2) Under the unexpected adjustment of epidemic policies and the superimposed e-commerce season, the above two points have boosted advertisers' willingness to advertise beyond expectations.

Zheshang Securities believes that TENCENT's Q2 advertising revenue will achieve a year-on-year increase of 26.1% to RMB 23.5 billion. The external macro environment is warming up, and internal business channels and efficiency are continuously optimized (in April, the new creator split plan was launched to support advertising revenue by displaying advertising content in the comment area, and the mixed AI model was added to improve recommendation accuracy and conversion rate), and it is expected that the rapid repair trend can be continued in Q2.

During the entire repair process, effect advertising with high certainty will take the lead, and media advertising will exert its efforts in the second quarter and subsequent quarters.

Jinke Enterprise Service: Jinke's post-epidemic repair, AI opens up cloud service space

It is expected that TENCENT Jinke Enterprise Service (financial technology and enterprise services) will achieve revenue of RMB 47.5 billion in the current quarter, a year-on-year increase of 11.2%, a month-on-month increase of 0.62%, and 0.14% lower than expected, mainly due to the significant consumption repair trend in the first quarter.

Zheshang Securities believes that TENCENT's Q2 Jinke Enterprise Service revenue will achieve a year-on-year increase of 22.5% to RMB 51.7 billion. After experiencing adjustments in 2023, Jinke Enterprise Service business:

1. Commercial payment business will significantly benefit from the recovery of macroeconomic conditions; 2) Regulatory marginal easing releases the potential of consumption, wealth management, and insurance businesses; 3) SaaS projects accelerate commercialization; 4) The wave of large models brings incremental demand for cloud computing.