I think Tencent can rise to HK$500

After the last release of Tencent's financial report, I quickly judged Tencent's investment value and made the judgment that Tencent has a high investment value. At present, Tencent has announced its first quarter results as of March 31, 2024. The financial report shows:

- Revenue was 159.501 billion yuan (RMB, the same below), a year-on-year increase of 6%;

- Net profit was 41.889 billion yuan, a year-on-year increase of 62%;

- Adjusted net profit was 50.265 billion yuan, a year-on-year increase of 54%;

- Earnings per share were 4.479 yuan, a year-on-year increase of 64%;

- Non-IFRS earnings per share were 5.375 yuan, a year-on-year increase of 57%.

In the quarter before the financial report, Tencent's stock price bottomed out and rebounded, and the stock price had a relatively good upward trend. When Tencent handed over this financial report, although shareholders were relatively satisfied, the subsequent investment value should be more The focus of our analysis on this financial report.

In the past, the market’s interest in investing in Internet companies was based on business models, but the concern was that long-term barriers were being challenged, including the growth ceiling in China. In this financial report, we will focus on business models and business conditions to analyze the investment value.

1. This financial report reflects the reliability of the business model.

Judging from the data reflected in the financial report, Q1 revenue in 2024 increased by 9.515 billion yuan, but the cost side actually dropped by 6.173 billion yuan, which in turn increased gross profit by 15.688 billion yuan. This reflects that Tencent’s business model has higher value It is its business model. Tencent has a very light business model, which mainly relies on games, advertising, financial technology and other businesses. It has low investment requirements in fixed assets and has high overall operating leverage. This is what we mentioned in the last financial report.

"Taken together, Tencent's fundamentals are solid. By continuously reducing costs, the money saved will be used to expand new businesses (such as video accounts, etc.) and expand overseas development. This business model is very easy to implement and it has to be said. Tencent’s senior management team has a very clear vision of the company’s development path.”

From the 2024Q1 financial report, we can find that Tencent continues to continue such an asset-light business model. Once the economy picks up, Tencent's business revenue growth will far exceed the cost growth rate, and what is actually reflected in the income statement is " Tencent can not only increase revenue, but also reduce costs." This is the value of investing in Tencent that is worth paying attention to: "the lightness of the business model."

After compressing operating costs, we will find that revenue increased by 6% year-on-year (159.5 billion yuan), overall sales expenses increased by only 7% (7.5 billion yuan), and general and administrative expenses (usually based on wages) only increased 1%, which also shows that Tencent, with the support of this business model and the continuous internal anti-corruption, does not spend much money on sales, but it can support the continuous upward growth of the business. After efficiently adjusting human resources, it can also reduce the overall general and administrative costs. expenditure.

Our comprehensive conclusion is: Tencent's business model reflected in this financial report is still very light and highly profitable, so what we should pay more attention to is long-term competitiveness and business performance.

2. How is Tencent’s business situation?

We believe that Tencent is good at leveraging its social traffic advantages to match its game business with its traffic advantages to create cash flow. Therefore, Tencent's game business accounts for the largest proportion of its business revenue, and its short video business is a focus of future growth.

So what we need to evaluate is:

1. Has Tencent’s traffic advantage been lost?

2. Has Tencent’s game business declined due to the influence of competing products?

3. How is the short video business developing?

1. Has Tencent’s traffic advantage been lost?

Against the background of a high base, WeChat is growing very well, both year-on-year and month-on-month. The current combined monthly active users have reached 1.359 billion. QQ, as an old product, has weak growth and has experienced negative growth. However, currently It is not easy to maintain 553 million combined monthly active users.

In addition, other highlights disclosed in the financial report are also worthy of attention:

(1) The total user usage time of video accounts increased by more than 80% year-on-year. By expanding product categories and encouraging more content creators to participate in live streaming, we have strengthened the ecology of live streaming through video accounts.

(2) The total user usage time of mini programs increased by more than 20% year-on-year. Among them, the average daily usage of non-game mini-programs achieved double-digit percentage year-on-year growth, and mini-game revenue increased by 30% year-on-year.

So the progress of the video account, especially the strengthening of the competitiveness of the video account in the e-commerce field, is bound to bring another "business segment that has not been completed for many years - e-commerce" to Tencent's investors. The video account carries Tencent's The new e-commerce dream, although the old dream has failed several times in the torrent of history, but currently relying on video accounts, if the e-commerce business grows, it will also bring new imagination space to Tencent's business growth.

Secondly, there are mini programs. After the current Internet penetration rate has peaked, residents' willingness to directly download apps has suddenly declined. The increase in the total usage time of mini programs has also brought new business imagination space to WeChat.

Therefore, looking at the overall situation, we find that Tencent’s current traffic advantage based on social networking has not disappeared. On the contrary, after adapting to the new era, its competitiveness is strengthening.

2. Has Tencent’s game business declined due to the influence of competing products?

(1) How is Tencent’s games going overseas?

The total revenue of games in the international market increased by 34% year-on-year. This was due to the rebound in popularity of Supercell's games (especially "Brawl Stars") and the growth of users and revenue of "PUBG MOBILE". Due to Supercell's long deferral cycle of game revenue, game revenue in the international market increased by 3% year-on-year to RMB 13.6 billion (stable year-on-year at constant exchange rates).

The total revenue of games in the local market resumed year-on-year growth, with an increase of 3%. Game revenue in the local market decreased by 2% year-on-year to RMB 34.5 billion due to revenue deferral.

I have to say that the market’s concerns are justified. Looking at business in China, Tencent’s game business has indeed peaked. This is also related to Tencent’s past practice of relying more on using traffic advantages and data advantages to discover and cooperate with popular games. , this will make Tencent's game business easy to make money, but as the game industry continues to develop, the requirements for content will increase, which will also require Tencent's game self-research capabilities to be higher. If you want to make an overall breakthrough, it may still take time.

(2) Tencent’s flagship game relies on investment portfolio to stabilize

The capital market has been worried about Tencent's two old flagship games, namely "Honor of Kings" and "Peace Elite". We can see from the financial report disclosure: two local market flagship games "Honor of Kings" and "Peace Elite" Beginning to benefit from the new commercialization rhythm and the improvement of game content design, the revenue in 2024Q1 achieved year-on-year growth.

In addition to the two old games, the revenue of Tencent's many local market games such as "Spade Battle", "Cross Fire Mobile" and "Dark Zone Breakout" hit record highs this quarter.

Supercell's games have achieved growth in user base and revenue; the number of daily active accounts of "Brawl Stars" in the international market has more than doubled, and revenue has exceeded four times that of the same period last year.

As far as individual games are concerned, the revenue of "Honor of Kings" declined year-on-year due to the high base during last year's Spring Festival. The revenue of "Peace Elite" declined year-on-year due to weak commercial content in 2023H2. These were largely offset by revenue contributions from Tencent's recently released games, including Valorant and Ark of Destiny, as well as strong growth from Shovel War.

3. How is the development of short video business?

According to the financial report disclosure:

(1) The total user usage time of video accounts increased by more than 80% year-on-year;

(2) Revenue from video account live streaming services is growing;

(3) Growth of video account assistant advertising business: Online advertising business revenue in 2024Q1 increased by 26% year-on-year to RMB 26.5 billion, driven by the growth of WeChat video accounts, mini programs, official accounts and Souyisou;

(4) The increase in technical service fees for video account merchants will contribute to the growth of cloud business revenue;

We can see that with the growth of advertising revenue brought by short video business, the proportion of game business is declining (in terms of value-added services, 2024Q1 accounted for 49.29% of revenue, while 2023Q1 accounted for 52.90% of revenue), so the video number Development is also very helpful for improving Tencent's business structure.

However, there are not many video account business data disclosed in this financial report. We judge that Tencent has not yet used video accounts as a large-scale monetization tool, and is still continuously improving product capabilities and activity.

Based on the above situation, we found that Tencent has a significant moat and strong competitive advantages, but its game business is obviously weak in the country. It relies on its game product portfolio to maintain the status quo, but there are still greater opportunities overseas. At the same time, the video account is a spring breeze that brings new growth. , judging from the light business model, solid moat and business portfolio, we predict that once the economy picks up, Tencent's performance flexibility will be very significant.

So here comes a new question: What is the investment value of Tencent, which has risen sharply in the early stage?

3. We value Tencent

In the aforementioned research content, I have mentioned many times that long-term investment income comes from = EPS improvement * valuation change + shareholder return.

Therefore, a substantial increase in shareholder returns will be very helpful in improving Tencent's valuation level. In the aforementioned article, we also called on listed companies to pay attention to shareholder returns, which will help boost their own valuation levels. However, some market participants believe that "return Buying is not as good as paying dividends. Only dividends are genuine dividend returns." Here we have a different view.

Since Hong Kong stock repurchases generally require cancellation (although according to the latest consultation document issued by the Stock Exchange on October 27, 2023, on the proposed revision of the "Listing Rules" provisions for treasury stocks, it is recommended to amend the "Listing Rules" and launch a treasury stock mechanism (and solicit market opinions), then after the company completes the repurchase, the total equity will actually decline, which will help increase EPS (earnings per share) and avoid the cost of dividend tax caused by cash dividends.

Tencent's repurchase in 2024 will reach hundreds of billions of Hong Kong dollars, cash dividends are 3.4 Hong Kong dollars per share, and the current market value is 3.6 trillion Hong Kong dollars. Our calculations show that if hundreds of billions of repurchases are carried out at the current valuation, it will provide shareholder returns (100 billion Hong Kong dollars/3.6 trillion Hong Kong dollars) = 2.77% of the shares are cancelled. At the same time, the cash dividend of 3.4 Hong Kong dollars is equivalent to a pre-tax dividend of 0.89% based on the current closing price of 381.8 Hong Kong dollars per share. The comprehensive shareholder return is: 2.77%+0.89%=3.66%