CICC has issued a research report stating that Tencent Holdings' (00700) first-quarter non-IFRS net profit increased by 11% year-on-year, aligning with market expectations. Affected by deferred revenue recognition, first-quarter revenue grew by 9% year-on-year, which fell below market expectations. CICC maintains its revenue and non-IFRS net profit forecasts for Tencent for this year and next. The firm reiterates an "Outperform" rating and a target price of HK$666, corresponding to a projected non-IFRS price-to-earnings ratio of 20 times for this year.
The report noted that Tencent's first-quarter gaming business showed considerable growth in billings, with evergreen games reaching new highs. The later timing of this year's Lunar New Year led to the deferral of some game billings and revenue sharing to subsequent quarters for recognition. The firm anticipates second-quarter domestic game revenue to increase by 12% year-on-year, with overseas game revenue rising by 10%.
CICC stated that Tencent's first-quarter advertising revenue accelerated, growing by 20% year-on-year, and projects second-quarter advertising revenue to increase by 17% year-on-year. The firm calculated that first-quarter fintech business revenue grew by 7% year-on-year, exceeding prior expectations, driven by improvements in both volume and pricing for commercial payments, along with steady growth in wealth management services. First-quarter business services revenue grew by 20% year-on-year, benefiting from increased volume and pricing in cloud services. The firm forecasts second-quarter business services revenue to grow by 25% year-on-year, with fintech and business services revenue combined increasing by 10% year-on-year.
The report views Tencent's AI investments as proactive and manageable. Tencent open-sourced and released the preview version of its Hunyuan 3.0 large language model at the end of April, balancing practicality and cost-effectiveness, which has been deployed across 131 internal products for collaborative iteration, with the next step involving evolution towards larger parameter models. Management believes that WeChat, QQ, and WeCom serve as natural control interfaces for agentic AI. Future conversion of mini-program code into AI skills is seen as potentially building a differentiated ecosystem barrier. Excluding the impact of new AI products, first-quarter non-IFRS operating profit increased by 17% year-on-year, indicating robust profitability in core businesses, which is expected to provide ample cash flow to support AI investments. The firm estimates that Tencent's second-quarter adjusted operating profit and adjusted net profit will increase by 7% and 9% year-on-year, respectively.
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