Futu Research | Tencent Quarterly Report Preview: Operating profit is expected to surge by more than 20%, and business recovery is strong

Tencent$TENCENT (00700.HK)$The 24Q1 results will be announced on May 14. Tencent's stock price has risen 26% since the beginning of the year. The quarterly report will be released on May 14. What kind of answers will Tencent hand over? Will the stock price continue to rise after the earnings report is released or will there be a correction?

What are the key points to focus on in Tencent's earnings report?

Tencent's main business is divided into three segments: value-added service business focusing on games and social networking, advertising business, and fintech business. Among them, value-added services contribute quite a bit to the company's profits, while the profit margin of value-added services and advertising business is high, and the advertising business is growing the fastest. Therefore, we need to focus on analyzing changes in the company's game business and advertising business.

In addition to analyzing the operating situation, Tencent's shareholder returns are also very noteworthy.

Therefore, Tencent's current financial report for the first quarter has a few key points to focus on:

1. Can the game business stabilize and usher in recovery?

2. With the progress of monetization of video accounts, can advertisements continue to stand out?

3. Shareholder returns.

1. The revenue growth rate is expected to stabilize at around 6%, and the operating profit growth rate is over 20%

Value-added service business

The game business is expected to be dragged down by weak domestic games and high base effects in 24Q1, showing a slight decline in revenue. Sales of leading domestic game products “Wang Zhe Rongyao” and “Peace Elite” declined in 24Q1, dragging down domestic game performance, but operating data for products such as “Battle of the Golden Shovel” and “League of Legends” mobile games grew steadily, hedging part of the downward pressure on leading products. However, the social networking business, which is dominated by Tencent Video and Tencent Music, is not expected to change much. Due to the impact of last year's high base, revenue is expected to decline slightly year-on-year.

Overall, 24Q1 Tencent's value-added business revenue is expected to decline slightly year-on-year. However, Tencent management mentioned at the 23Q4 results meeting that the game business is expected to pick up in 24Q2, and it is expected that the game business will continue to recover.On the one hand, domestic games include the launch of the “DNF” mobile game to increase sales, and on the other hand, overseas games continue to pick up. For example, Supercell's classic game “Wild Brawl” has achieved remarkable results.

Advertising business

The advertising business is still expected to be driven by rapid growth in video channel traffic, and the 24Q1 revenue growth rate is expected to achieve high double-digit growth of 15% to 20%. According to the company's disclosure, the total user time of video accounts doubled in 2023, while the delivery scale increased dramatically year-on-year, and GMV was close to three times that of 2022. Therefore, with huge traffic, video accounts still have a lot of room to monetize. According to data from the General Administration of Market Regulation, 857 leading enterprises and institutions achieved a total advertising revenue of 274.06 billion yuan in the first quarter, an increase of 13.6% over the previous year.The revenue growth rate of Tencent's advertising business is better than the market average. Driven by video accounts, 24Q1 is expected to achieve a high growth rate of 15% to 20%.

Fintech business

Furthermore, the fintech business is highly correlated with macroeconomics. China's economic data for 24Q1 is relatively optimistic, and GDP in the first quarter exceeded expectations by 5.3% year-on-year growth. Considering the relatively positive economic environment and frequent trading activities, it is estimated that 24Q1's fintech business is still expected to achieve high single-digit growth of around 8%-10% under last year's high base.

Taken together, the company's 24Q1 revenue growth rate is expected to be about 6%, and the growth rate is stable. The company's revenue growth rate is expected to increase as the game business picks up further in Q2.

At the same time, it is expected that 24Q1 will strictly implement the strategy of reducing costs and increasing efficiency. Operating costs and operating expenses are expected to decline further, and gross margin and operating profit margin will continue to increase month-on-month compared to the previous quarter. The 24Q1 company's operating profit is expected to grow by more than 20% year-on-year

2. The company values shareholder returns and has a high margin of safety

The company places great importance on shareholder returns. According to management disclosure at the 23Q4 results meeting, the 23 annual dividend was distributed at HK$3.4 per share, an increase of 42% over the previous year. At the same time, the share repurchase scale was at least doubled, from HK$49 billion in 2023 to over HK$100 billion in 2024.

Since the announcement of the repurchase plan, the company's repurchase amount has been increased to HK$1 billion per day. If repurchases continue to be made according to this amount, the annual repurchase scale is expected to exceed HK$130 billion.

The current market value of the company is HK$3.48 trillion. If HK$100-130 billion is repurchased throughout the year, the repurchase will bring a return of 2.9-3.7%. Coupled with a 1% dividend rate, the company's shareholder return in 2024 will probably be around 3.9%-4.7%. In addition, Tencent also holds a huge investment portfolio of more than 126 billion US dollars, and there is still room to increase shareholder returns.

Taken together, Tencent's revenue is expected to increase by about 6% in 24Q1, and operating profit by more than 20%. At the same time, with the recovery of the game business in the second quarter, the company's profit growth rate is expected to continue to increase, and the fundamentals are solid. At the same time, the company also has shareholder returns of around 3.9%-4.7%, providing a high margin of safety.

Therefore, we believe that currently Tencent still has investment value. If the Chinese economy continues to recover or there are advantages such as interest rate cuts, Tencent's stock price is still very flexible, and investors are advised to buy it.

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