To The Moon

4Q2023 Earnings Review: Tencent’s $TENCENT(00700)$ Revenue increased by 7.07%, and Operating Income rose by 41.96% year-over-year in the latest quarter. The Operating Margin stands at 26.28% for FY2023, the highest in the past six years. VAS revenue shrank by 1.9% year-over-year, while Online Advertising and Fintech & Business Services grew by 20.82% and 15.1% year-over-year respectively in the latest quarter. Moving forward, we expect the weakness in VAS (especially weak gaming revenue) to be offset by margin expansion in Online Advertising and Fintech & Business Services. VAS revenue, accounting for 45% of total revenue, continues its lackluster performance mainly due to lower domestic gaming revenue and decreased Social Networks revenue (lower music/games-related live streaming services). More user spending time on short-form videos may potentially pull down VAS revenue. Domestic Games revenue continues its muted performance with a 3% decline in growth. International Games, which accounts for 8.9% of total revenue, also see muted 0.6% year-over-year growth. The current forecast suggests domestic gaming should grow in low single digits in 2024 as the China video game market is only forecasted to grow by 6% in 2024. Tencent Short Video supports Online Advertising revenue. Ad load remains much lower than industry peers, providing larger ad growth potential. FinTech and Business Services witnessed good growth in commercial payment activities, wealth management services, consumer loan services, eCommerce technology service fees within Video Account, and cloud services. In 2023, the Combined Monthly Active Users (MAU) of Weixin and WeChat grew by 2% year-over-year to 1.343 billion users, while Fee-based VAS registered subscriptions grew by 2% year-over-year to 248 million users. Its massive user base provides a good monetization story. Free Cash Flow of RMB 167 billion (+89%) in FY 2023 was more than enough to conduct share buybacks and dividend distribution to support the share price: Share repurchase: committing to over HKD 100 billion for FY24, up over 100% year-over-year. Dividend: proposing a cash dividend of HKD 3.4 per share, up 42% year-over-year. In comparison, Alibaba( $Alibaba(BABA)$ $Alibaba(09988)$ ) may have a harder time keeping up with the current pace of dividend payout + share buybacks for the next three years if its Free Cash Flow does not improve. Technical Analysis: The current share price of HKD309.6 has surpassed the 23.6% Fibonacci level at HKD309.38. The next significant resistance level is at HKD384.91. Source: Tiger PC App, 14 Apr 2024 Conclusion We foresee little hope for a recovery in domestic game revenue in 2024. However, the robust performance in advertising and Fintech and Business Services should continue to support its valuations. Tencent may emerge as an attractive investment alternative for gaining exposure to China's short video revenue, akin to Bytedance (which is not publicly listed). Like many Chinese companies, China accounts for 90% of Tencent’s total revenue. Consequently, Tencent’s business remains subject to strict regulatory oversight. Tencent’s forward PE is currently trading at 15.28x, higher than its 5-year average of 14.8x. As a result, we are neutral in the short term on Tencent but remain bullish in the long term.