Tencent Holdings：Maintain BUY and Increase PT to HK$590

$TENCENT(00700)$ -HK, BUY) - Solid 4Q Results Driven by Robust Games and Ads; Momentum Set to Continue in 2025; Maintain BUY and Increase PT to HK$590

We maintain our BUY rating and increase our price target to HK$590 (previously HK$450) after Tencent reported largely in-line 4Q24 results, with revenue and profitability slightly ahead consensus. Total revenue grew 11% y/y to RMB172.4B, exceeding consensus by 3%, primarily driven by stronger-than-expected VAS and ad segments.

Domestic game revenue accelerated to +23% y/y in 4Q24 (vs. +14% y/y in 3Q24), driven by robust performance from key evergreen titles including Honour of Kings, Peacekeeper Elite, and VALORANT, along with solid contributions from new launches like DnF Mobile and Delta Force. International game revenue grew 15% y/y (16% on constant currency basis vs. +11% in 3Q), supported by strong performances from Brawl Stars, PUBG Mobile, and the early access launch of Path of Exile 2.

Marketing Services revenue grew strongly at +17% y/y, stable sequentially, benefiting from robust advertiser demand for Video Accounts (+60% y/y), Mini Programs, and Weixin Search ads. AI-driven enhancements significantly improved targeting effectiveness, further driving advertiser ROI.

FinTech and Business Services revenue growth moderated slightly to +3% y/y (vs. +2% in 3Q24), driven by improved commercial payment volumes and sustained growth in consumer lending and wealth management services. Cloud revenue faced temporary constraints due to internal GPU demand but is expected to re-accelerate in 1Q25 following recent GPU procurement.

Shareholder return. During 2024, Tencent repurchased approximately HKD112B worth of shares, a significant increase from the prior year, underscoring management's confidence in sustainable earnings growth and long-term value creation. The board recommended a 32% dividend increase to HKD4.50/share for 2025 and to repurchase at least HKD80 billion worth of shares.

4Q revenue was 1% above Tiger and 3% above consensus. VAS revenue (+14% y/y) exceeded Tiger and consensus estimates by 3%. Online Advertising (+17% y/y) was 1% ahead of Tiger and 4% ahead of consensus. FinTech & Business Services (+3% y/y) was slightly (1%) below Tiger but 1% above Street.

Profitability largely in line. Gross margin expanded to 53%, improving 3ppts y/y, reflecting a higher mix of high-margin domestic games, continued ad efficiency gains, and improved profitability in FinTech and Cloud services. Non-GAAP operating margin was robust at 34.5%, up 2.8ppts y/y, and was 81bps/44bps above Tiger/Street.

Looking into 1Q25, Tencent appears well-positioned to sustain its revenue momentum, driven by strong engagement in key domestic games during the Chinese New Year holiday and ongoing robust demand in Video Accounts and Weixin Search advertising. Seasonal factors should further support advertising revenues, particularly in eCommerce-related segments. The significant GPU investments initiated in late 2024 will begin contributing to accelerated growth in cloud services revenue, enhancing overall profitability. While the company has guided for continued elevated capital expenditures into 2025—anticipated to be in the low-teens percentage of revenue—primarily focused on AI infrastructure build-out, these investments are expected to yield meaningful productivity improvements and efficiency gains across game development, ad targeting, and cloud operations, providing potential margin upside in the medium to long term.

Estimate revisions. Increasing 1QE total revenue estimate by 1%, gross income estimate by 1%, adjusted EBITDA by 3%. Increasing '25E revenue and gross profit estimates by 1%, and adjusted EBITDA by 2%.

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Tencent Holdings：Maintain BUY and Increase PT to HK$590

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