To The Moon

After the Hong Kong stock market closed on August 14, $ Tencent Holdings (00700)$ announced its 24Q2 earnings report.Prior to the Q1 earnings report, Tencent's performance warming trend if the "spring flowers" to describe, then this Q2 earnings report is the "summer wood lush".

The main performance is as follows:

1. Game business rebounded steadily, old games revitalized, new games exploded, and overseas incremental growth was encouraging;

2. Social network (video, music) hit another record high, and hot IP helped subscription rise;

3. WeChat ecosystem further boosted advertising business to rise beyond expectations;

4. Offline financial collection consumption dragged, wealth management business maintained growth, and enterprise services also benefited from WeChat ecological activities such as small programs.

5. Gross margins are steadily improving, marketing expenses are stable but not continuing to control fees, and affiliate profits and interest income are helping net profit soar

6. Valuation multiples have further declined, highlighting the investment value.

Investment Highlights

1. The gaming business continues to rebound, with old games continuing to spring to life and new games starting to contribute to revenue.Since Q1, the trend of outflow rebound is obvious, coupled with Q1 deferred revenue obviously back to growth, Q2 game revenue rebound is not surprising, and continued to hit a three-year high.However, the "game performance better than market expectations" thing has been expected by the market.

   • Domestic game revenue due to the release of the new game DNF handheld game, from the previous few quarters of retraction back to growth, reached 34.6 billion yuan, an increase of 9% year-on-year, Q1 was down 2% year-on-year;

   • The old game "king's glory" "peace elite" because of the new and water flow back to growth, including "naruto handbook" "gold shovel shovel" a variety of games water flow more than the market expectations, we believe that, in fact, also because of the "original god" of the entry into the recession cycle, feeding a wave of the market, which also shows that, once there is a sectoral warming up, as well as in the industry there is no explosive handbook, the influence of the old IP is still important!.

   • Overseas performance was very strong, with an overall year-on-year rise of 9%, and last year's base was not low, and this growth was also brought about by the new game Dungeons & Dragons Handheld Game, which was officially launched on May 21st.The game was launched in the domestic market performance, only 10 days to break through the $ 100 million revenue record, June revenue close to $ 251 million, become the highest income of the month's hand tour.This cycle is estimated to continue for a long time;

     

   • Deferred revenue of 111.8 billion yuan was up 15.6% year-on-year and 1.5% sequentially, suggesting that gaming results won't be too bad in the coming quarters.

     

2. The importance of the WeChat ecosystem continues to grow.Advertising revenue was 29.9 billion, up 19% year-on-year.Although down from 26% in the previous quarter, last year's Q2 was the first cycle of the WeChat ecosystem's take-off, with a very high base, and the growth on this basis is a further indication of the strong capacity for sustained growth brought about by the advertising share of the video number, small programs, public numbers, small games, and so on.

   • The rebound of the advertising business is also gained from the WeChat ecosystem, including new games, online advertising of consumer products, and the improvement of advertising efficiency brought by the use of AI technology. It is worth mentioning that the user hours of small programs exceeded 20% year-on-year, and the water flow of small games also exceeded 30% year-on-year, which has become a very important growth item.

   • Social network revenue also ushered in a certain outbreak in Q2, Tencent video because of "Qing Yu Nian 2" drove membership growth of 13% to 117 million.Also at the end of Q2, Tencent debuted its first-ever collaboration with Miwei to launch The Wonderful Night of Pleasant People.Tencent Music's membership also grew by 18%, with the middle-aged group, which was previously difficult to reach, being an important addition.

   • Upgrades to the advertising platform also improved the analysis of user preferences to facilitate more accurate ad push.

     

3. The FinTech business was mixed .

   1. Among them, enterprise services started to benefit from the further ramp-up of activities such as small programs after the completion of cost reduction and efficiency enhancement.Meanwhile, the reduction of low-margin subcontracting business in cloud services also further optimized server costs, resulting in a 10-percentage-point improvement in the gross margin of the entire segment to 48% from 38% last year.

   2. The most crotch-pulling sub-segment in Q2 was undoubtedly the financial business related to offline commercialization activities, with inactive consumption and lower revenues from WeChat withdrawals and other businesses, as well as a slowdown in consumer loans and other businesses;

   3. However, wealth management revenue grew by double digits as in Q1, indicating that more people tend to invest more conservatively at the moment.This aspect of the company is also in line with the macro cycle.

4. Gross profit margin hit a record high and marketing activities returned to normal.

   1. The overall gross profit margin rose to 53% from 47% in the same period last year, also a new high in recent years, due to faster growth in high-margin businesses such as games and advertising;

   2. But cost reduction and efficiency has ended, Q2's marketing expense growth of 10%, instead of exceeding the growth rate of overall revenue, also shows that the company does not have further control of expenses, the company should carry out the investment is still in the investment.

   3. Overall operating profit of 52.6 billion yuan, the margin reached 33%.

5. Non-operating income strengthened to collect the impact of the macro cycle.

   1. Associates returned to profitability, with Q2 associates earning $7.7 billion, much higher than Q1's $2.2 billion, and five times higher than last year's $1.15 billion.

   2. Interest income also reached 2.8 billion yuan. The increase in overseas water flow also allows Tencent to further take advantage of short-end U.S. bond rates remaining high.

Valuation levels

Valuation basis further improved.Final Q1 realized Non-IFRS net profit of 48.37 billion yuan, an increase of 82% year-on-year, due to market expectations began to be more conservative, while some have recently begun to improve, but this result is still greatly exceeded market expectations.Valuation is also further supported.With the closing price of 373.8 Hong Kong dollars on August 14 to calculate.

1. If the billion adjusted EPS, valuation TTM PE's from the 21 times, slipped to 17 times.

2. If EBITDA, valuation TTM of EV/EBITDA also slipped from 14x to 13.5x.

Major shareholders' reductions continue and shrinkage continues, with $Prosus NV (PROSF)$ still holding about 2.27 billion shares of Tencent, or 24.3% of the position.

Additionally, repurchases totaled $52.3 billion in the first six months, with 154 million shares written off, so watch the call for information on the repurchase program.