Tencent Holdings First Quarter Performance Outlook: Gaming business may be affected by high base numbers, advertising business is expected to rise in tandem with volume

According to the Wise Finance APP, Tencent Holdings (00700) will release its first quarter financial results for 2024 tomorrow (May 14). Most securities firms predict a year-on-year increase in first quarter revenue of 4%-6%, with non-IFRS net profit growth ranging from 20% to 35%. TF Securities forecasts that Tencent Holdings' 1Q2024 revenue will be around 156.1 billion RMB, up by 4.1% year-on-year, with a non-IFRS attributable net profit of approximately 41.8 billion RMB, a 28% year-on-year increase; the non-IFRS attributable net profit margin is about 26.8%, up by 5.1 percentage points year-on-year and a slight decrease of 0.7 percentage points quarter-on-quarter.

Guohai Securities predicts that Tencent's Q1 2024 operating revenue will reach 159.3 billion RMB (YoY +6%, QoQ +3%), with a non-IFRS attributable net profit of 44 billion RMB, a 35% year-on-year increase, and a non-IFRS attributable net profit margin of 28%.

Nomura estimates that Tencent Holdings' first quarter of the 2024 fiscal year will see a 33% year-on-year increase in non-IFRS net profit. Due to weak performance in the online gaming business, operating revenue is expected to maintain a 6% growth year-on-year. The bank believes that Tencent, affected by the high base effect from a year ago, may see a 4% year-on-year decline in network game revenue in the first quarter of the 2024 fiscal year, while domestic game revenue may decline by 6% year-on-year.

Citi believes that Tencent's first quarter revenue is expected to meet market expectations, with profits possibly slightly higher than market expectations. With a high base and a lack of meaningful game product releases, it is expected that domestic game revenue in the first quarter will decline by 6% year-on-year, while international game revenue will increase by 1.5% year-on-year. Total revenue is expected to increase by 5.3% year-on-year, gross profit by 14.7% year-on-year, and non-IFRS net profit by 35% year-on-year.

Morgan Stanley indicates that Tencent's first quarter revenue is expected to increase by 5% year-on-year, compared to the market's expectation of 6%, mainly due to weak growth in the gaming business and a slowdown in financial technology and enterprise services, while advertising business growth remains strong. It is expected that gross profit and net profit growth will be stable, with an expected increase of 18% and 25% year-on-year respectively, and the increased share buyback after Prosus' first-quarter sell-off is expected to be sufficient.

Haitong International expects Tencent's total revenue in the first quarter to be 157 billion RMB, up 5% year-on-year and 1% quarter-on-quarter, slightly lower than the bank's original expectation by 1%. The bank roughly maintains its forecast for Tencent's first quarter non-IFRS net profit at 43 billion RMB, up 33% year-on-year and 1% quarter-on-quarter.

Pressure on Q1 Gaming Business Due to High Base Effect

Nomura points out that Tencent, affected by the high base effect from a year ago, may see a 4% year-on-year decline in network game revenue in the first quarter of the 2024 fiscal year, while domestic game revenue may decline by 6%. Additionally, they believe that Tencent's international gaming business may see a 2% year-on-year growthAt the same time, the company's online advertising revenue may increase by 19% compared to the same period last year, with estimated video account ads accounting for 13% of the total. Benefiting from the increase in the share of high-profit businesses such as video account ads, Tencent's gross profit margin may continue to expand. It is expected that the gross profit margin will increase by 3 percentage points year-on-year to 49%, supporting the company's stable profit growth of 33%.

UBS predicts that Tencent's domestic game performance in the first quarter may be weak, with a year-on-year decline of 5%. Given the high base of "King of Glory" last year and changes in its monetization strategy, the impact is partially offset by strong performances of other games such as "Battle of Chantui" and "Breakthrough in the Dark Zone". International market game revenue is expected to remain flat year-on-year. In addition, the bank expects Tencent's first-quarter advertising revenue to increase by 16% year-on-year, slightly lower than the market expectation of 19%, mainly due to the strong growth of Video Account (VA) and advertising technology improvements; financial technology revenue is expected to increase by 16% year-on-year; gross profit margin is expected to increase by 3.8 percentage points to 49.2% year-on-year.

However, TF Securities stated that the market already has relatively sufficient expectations for the flat gaming performance in 1Q2024. Starting from 2Q2024, with: 1) the return of the base of head long-term games and improved operations (including "King of Glory" and "BrawlStars", etc.), and: 2) heavyweight new games successively launched (including "Dungeon and Warriors: Origin", "SquadBuster", etc.), we expect the growth of the gaming business to enter a recovery track, driving revenue growth to rebound, with further room for improvement in short-term fundamental valuation constraints.

Slight Increase in Financial Technology Growth Rate, Gross Profit Expected to Continue Growing

TF Securities predicts that the year-on-year growth of financial technology and enterprise service revenue in 1Q2024 will be +8%, slightly lower than 4Q2023, mainly due to the bank's expectation that the high base of financial technology service revenue in 1Q2024 will fall to a high single-digit level (after the optimization of epidemic prevention and control policies, active offline commercial payments in 1Q2023). Enterprise service revenue in 4Q2023 increased by 20% year-on-year, and the bank expects this growth rate to continue in 1Q2024, focusing on the progress of Video Account live e-commerce operations and infrastructure investment.

In terms of gross profit, the company's gross profit margin for financial technology and enterprise services increased from 27.1% in 4Q2021 to 43.9% in 4Q2023, with a year-on-year growth of 38% in 2023. This includes the recovery of operating leverage driven by the warming macro demand, the increase in gross profit margin driven by cloud business restructuring, and the rapid development of service fees for Video Account live e-commerce. We expect the trend of gross profit margin improvement to continue in the medium term.

Guosen Securities predicts that the company's financial technology and enterprise service revenue will be 52.1 billion yuan, a year-on-year increase of 7%. According to the central bank's balance sheet of monetary authorities, non-financial institution deposits (customer reserve deposits paid by payment institutions to the central bank) were at a high base in January last year, with year-on-year changes in January/February/March at -8%/+7%/+2% respectively. The bank calculated that non-financial institution deposits (average of beginning and ending of the quarter) in 24Q1 increased by 5% year-on-year (11% increase in 23Q4)

Incremental Revenue from Video Traffic Drives Significant Growth in Advertising Business

TF Securities expects Tencent's 1Q2024 advertising revenue to increase by +18% year-on-year, mainly due to the continued healthy growth of video traffic, orderly expansion of advertising, and the enhancement of AI technology platform for improved ad placements.

The firm points out that the company's advertising gross margin has increased from 36.7% in 1Q2022 to 56.8% in 4Q2023, with a year-on-year growth of 47% in 2023. This growth includes the rebound of operating leverage driven by macroeconomic demand recovery, as well as the rapid increase in the proportion of high-margin video advertising. The firm expects the favorable impact of the latter to continue in the medium term. Attention is focused on the impact of the increase in advertising base in 2Q2024 at the marginal level.

Meanwhile, Guosen Securities also predicts that Tencent's online advertising revenue will reach 24.7 billion RMB, an 18% year-on-year increase. Based on a 2-year CAGR, 1Q is expected to be 17%. The growth in advertising is mainly attributed to the steady growth of video traffic and the gradual opening of more advertising spaces. In addition, by the end of 2023, there was increased investment in live streaming through video channels, adjustments in the organizational structure of WeChat Pay and the video team for better collaboration. The firm expects that subsequent internal circulation advertising revenue will gradually increase in video channels