To The Moon

Tencent's 4Q22 results was surprisingly better than expected, with total revenue increasing by 0.5% YoY to Rmb145bn and adj. EBIT growing by 18.9% YoY to Rmb39.4bn. Double-digit YoY growth in international games and online ads revenue partly offset the weaker performance of fintech & business services (FBS) revenue due to Covid outbreaks. However, FBS rebounded quickly and new domestic games exhibited positive momentum in 1Q23.

Online game: solid growth in both domestic and international market!

The total revenue from online games increased by 0.2% YoY to Rmb50.7bn. International games revenue grew by 5% YoY to Rmb13.9bn, or 11% YoY after excluding currency impact and supercell-related true-up adjustments made in 4Q21. This growth was driven by popular games such as Valorant, League of Legends, Goddess of Victory: NIKKE, and Warhammer 40,000: Darktide. Domestic game revenue declined 1.6% YoY to Rmb36.8bn, mainly due to the weak performance of legacy games. However, Tencent’s "Honor of Kings" resumed YoY growth in daily active users (DAU) and gross receipts achieved a record-high during the Chinese New Year period. In addition, Tencent launched a new game called "Undawn" domestically in February, which falls under the new survival open-world crafting (SOC) genre. Tencent has already obtained six game approvals in 2023. Moreover, NIKKE PC version was launched overseas in February 2023.

Positive changes to domestic gaming regulations will not only generate revenue from new game launches, but also increase monetization of existing key titles. Grossing receipt for domestic gaming has recovered to year-over-year growth in 4Q22, and revenue growth is expected to accelerate starting from 1Q23, driven by both existing games and new games. In terms of international gaming, revenue has returned to positive growth in 4Q22. Despite a relatively small mid-single-digit market share in the international game market, Tencent's international games contributed to one-third of total game revenue in 4Q22. It is likely that international gaming will become one of Tencent's long-term growth drivers.

Ad revenue continuing positive momentum into 2023

Revenue from online advertising increased by 14.6% YoY to Rmb24.7bn, boosted by higher advertising spending from ecommerce, FMCG and gaming companies. Social and other advertising revenue grew by 17% YoY, supported by strong demand for video accounts, mini-programs, and the rebound in the mobile ad network. Video accounts generated over Rmb1bn in advertising revenue, with total time spent exceeding that of Moments by 1.2x. Additionally, media advertising revenue rose 4% YoY, driven by higher monetization of music content that is supported by advertising.

Growth momentum for Tencent's advertising business will likely continue into 2023. It was a pleasant surprise to see Tencent's strong recovery in online ads, with revenue growing by double-digit percentage in 4Q22, marking the first positive growth since 4Q21. In addition to the favourable macroeconomic environment, Tencent's ads revenue is likely to outperform its Internet peers in 2023 driven by several factors: (1) release of additional ads inventory, such as Video Accounts; (2) improvements in ad tech; and (3) an increase in ad demand due to interoperability.

Unexpected revival for Fintech!

In 4Q22, FBS revenue decreased by 1.5% YoY to Rmb47.2bn due to Covid outbreaks causing a temporary decrease in payment activity. Additionally, cloud revenue fell YoY as Tencent scaled back unprofitable activities and shifted its focus towards self-developed PaaS, particularly in the video cloud and databases space. Nonetheless, payment volume has already rebounded to double-digit growth in QTD 1Q23, benefiting from the consumption recovery, with mini programs contributing a high percentage to commercial payment volume. Wealth management is expected to become a new growth driver as Tencent enhances its services and broadens its product line. Cloud growth is anticipated to normalize in 2023 after rebasing.

For the first time since the tightening of regulations in late 2020, Tencent's management expressed optimism regarding the outlook for their Fintech business. Along with the cyclical recovery (with commercial payment volume rebounding to double-digit YoY growth in QTD 1Q23), Tencent’s management also discussed their plans to introduce new services and enhance existing Fintech offerings. With a large total addressable market, relatively low penetration, and a more favourable regulatory and competitive environment, Fintech revenue is expected to achieve a CAGR of over 20% in the coming years, becoming a significant driver of revenue and profit for Tencent. Furthermore, this could potentially lead to a re-rating of the group's multiple if investors regain confidence in the long-term growth potential of Tencent's Fintech business.

Conclusion

Following the release of Tencent's 4Q22 results, I have a more optimistic outlook on Tencent's earnings growth potential in both the short and long term. In addition to the recovery of consumer spending, several company-specific developments will likely contribute to positive earnings surprises and stock performance over the next few quarters, including gaining market share in online advertising, revitalizing their Fintech operations, and returning to normal levels of cloud operation and revenue growth following a one-year strategic transition. Tencent’s revenue mix is also likely to shift towards higher margin business, such as advertising, and continued cost optimization will lead to improved margins in 2023.

@Daily_Discussion @TigerStars