Disappointed with TENCENT's Q1 performance? Focus on these four growth points in Q2.

TENCENT has released its Q1 financial report. Overall, TENCENT's revenue exceeded market expectations by 2%, while profits were slightly lower than market expectations by 2%.

Benefiting from the rebound in high-profit game business revenue, incremental revenue from video accounts, and effective cost reduction measures.

TENCENT's Hong Kong stock fell by about 4% today, indicating that the market is not very satisfied with TENCENT's performance. Currently, TENCENT is down about 1%.

Performance Highlights

1. Games: Local games resumed positive growth (+6%), and the Spring Festival peak season boosted user activity and willingness to pay. Explosive game operations drove some stock game revenue to a new high. Overseas games maintained high growth (+25%), which was significantly higher than our expectations. New games such as "Goddess of Victory: Niji", "Triple Match 3D", and "VALORANT" contributed to the increase.

2. Advertising: Revenue increased by 17% year-on-year, driven by the recovery of consumer spending and increased advertising spending in most industries. WeChat ecosystem contributed more than 50% of advertising revenue, video accounts maintained high growth, and eCPM was higher than the industry average. The advertising alliance added more high-conversion inventory.

3. Financial technology and enterprise services: Revenue increased by 14% year-on-year, of which financial technology revenue resumed double-digit growth year-on-year, and enterprise service revenue resumed positive growth year-on-year due to the gradual stabilization of cloud business, while video accounts live streaming e-commerce contributed to the increase.

Q2 Outlook

According to CICC, due to the new high of game revenue in Q1, it is expected that game revenue will maintain good performance in Q2 (year-on-year increase of 10%, local +6%/overseas +24%), driving total revenue growth to accelerate to 16%, reaching 156.1 billion yuan.

Affected by the continuous impact of cost reduction and efficiency enhancement and the continuous adjustment of revenue structure, high-profit business revenue such as games/advertising is expected to perform well. It is expected that the growth of operating profit after adjustment will continue to be faster than revenue, increasing by 23% to 45.2 billion yuan, with a profit margin of 29%, optimizing year-on-year by 1.6 percentage points.

The game business exceeded expectations, and the industry is gradually returning to normal operations. TENCENT games still have advantages. Considering the stability and richness of old games, the revenue for 2023/24 is raised by 3%/2%, and the net profit for 2023 is expected to increase by 27%, which is better than the revenue growth rate.

Four Key Points

TENCENT's key game "Arknights" will be launched in the summer, and "Fearless Contract" will start internal testing on June 8.

It is expected that the advertising business in 2023 will continue to rebound with the macroeconomic recovery.

In addition, the company is testing a new financial business "Fenfu". It is expected that with the launch of the "Fenfu" business in the future, it will further drive the growth of the financial business.

TENCENT is increasing its investment in artificial intelligence and cloud infrastructure, and is expected to drive the acceleration of subsequent business development in the era of large models.

Investment Advice

CICC stated that it will switch the valuation to 2024, corresponding to a core business P/E ratio of 25 times in 2024, a payment P/E ratio of 20 times, and a cloud business P/S ratio of 2 times. The **SOTP target price is raised from HKD 445 to HKD 450, corresponding to a P/E ratio of 28/24 times in 2023/24. **Current price corresponds to a 15x P/E ratio for 2023, and a PEG ratio of 1x for 2022-2025 profit growth. Maintain buy rating.

Guotai Junan Securities stated that considering the cost reduction and efficiency improvement of TENCENT in the following quarters, it is expected that the NON-IFRS net profit for 2023/2024 will be 150.1/175.8/201.3 billion yuan respectively. The current stock price corresponds to a P/E ratio of 19.48/16.63/14.53X. Maintain a "buy" rating.

Industrial Securities stated that it is expected that the revenue for 2023/2024/2025 will be 625.5/701.4/788.6 billion yuan respectively, and the Non-IFRS net profit attributable to the parent company will be 142.9/163.3/183.6 billion yuan. Based on the DCF model, maintain the target price of HKD 435.