Tencent Q2 2024 Earnings Review: Strong Growth Amidst Macro Challenges
Tencent reported its second-quarter earnings for the period ending June 30, 2024. The financial report shows:
Before the release of the earnings, the market was volatile, with concerns about the impact of macroeconomic factors on Tencent's business as well as anticipation for strong performance in the gaming sector. Now that the results are out, let’s break down how the financial report performed and what the outlook is.
How did Tencent achieve growth?
Upon analyzing the financial report, we find: Revenue grew from 149.208 billion yuan in Q2 2023 to 161.117 billion yuan, an increase of 11.908 billion yuan, or 8% year-over-year. However, operating profit rose from 36.283 billion yuan to 50.732 billion yuan, a significant increase of 39.73%. This suggests that the growth in operating profit was more elastic than revenue growth, which is intriguing and worth exploring further. Why do we focus on operating profit? Because after excluding investment income, operating profit better reflects the overall operational situation. What factors contributed to this growth? We can observe: (1) Operating costs decreased from 78.368 billion yuan to 75.222 billion yuan. This reduction in total costs directly increased gross margins. We understand that Tencent’s internet ecosystem enables many business lines to share resources, which controls total costs while driving revenue growth. In our analysis of Tencent’s 2023 annual report, we mentioned that Tencent operates like a money-printing machine for this reason. (2) Other cost items, such as sales expenses, grew by 10.18%, and general and administrative expenses increased by 8.15%. While these increases were significant, they seem manageable. It also appears that cost-cutting measures related to employee expenses concluded in Q2 2024.
Overall, the results look good, but how do the details break down?
Breaking Down the Revenue Streams:
(2) Online advertising business revenue grew 19% to 29.9 billion yuan in Q2 2024, primarily driven by the growth in WeVideo and long-form video revenue. Due to reduced advertising budgets by some internet service companies, Mobile Ad Alliance revenue declined, so the advertising business was indeed affected by macroeconomic factors. However, the growth in WeVideo and long-form video offset the negative impact.
(3) Fintech and business services revenue increased 4% to 50.4 billion yuan in Q2 2024. Fintech services revenue growth slowed to low single-digit percentage rates, with commercial payment revenue growth further decelerating, reflecting slow consumer spending growth. Additionally, the decrease in consumption loan service revenue was due to enhanced risk management measures, while wealth management services revenue saw double-digit percentage growth. Business services revenue achieved double-digit growth, benefiting from cloud services revenue growth (including the commercialization of WeCom) and increased merchant technical service fees from WeVideo.
So, did the macroeconomic impact really affect Tencent? From the financial report, our conclusion is "yes," particularly in terms of Mobile Ad Alliance revenue and fintech (which can be understood as payment services).
However, we can clearly see that Tencent, through its comprehensive internet ecosystem, continues to create high-quality products to generate more revenue and profit. Given such excellent results during a period of macroeconomic volatility, Tencent's potential for growth is likely to be even greater once the economy recovers.
At this point, we should focus on Tencent's moat.
Tencent’s Moat:
With WeVideo integrated into Tencent’s ecosystem, where is the future growth potential? If it were just a social app, it would need a great user experience and early market penetration to build network effects. In a competitive international market, Tencent’s social capabilities combined with WeVideo and long-form video content will open up space for future business growth.
What Can Investors Expect?
As mentioned earlier, “Tencent, through its comprehensive internet ecosystem, continuously creates high-quality products to generate more revenue and profit. Given such excellent results during a period of macroeconomic volatility, Tencent's potential for growth is likely to be even greater once the economy recovers.” Moreover, in the closing remarks, it is stated: “We remain committed to the core principle of 'User First, Technology for Good.' We will continue to strive to create value for shareholders and society, while actively promoting innovations, meeting societal needs, and contributing to a sustainable future.” Therefore, we can expect that as Tencent’s business grows, it will likely continue to provide shareholder returns. For 2024, there was a significant buyback; if performance continues to improve, will 2025 see even more? Based on current market forecasts for 2024-2026, the expected Non-IFRS parent company’s net profit is between 210-270 billion yuan, with a compound profit growth rate of around 15%. Tencent’s valuation is currently at 3.19 trillion yuan. Given past shareholder returns, most of the rewards will likely be distributed to shareholders. Currently, shareholder returns are around 6-7% ((dividends + buybacks) / total market capitalization). With 15% compound growth, shareholder returns will reach a new level. Assuming Fed interest rate cuts and continued global economic recovery, Tencent is likely to grow beyond current levels. At its current valuation, it offers attractive shareholder returns, a robust moat, and strong growth. At this price, we believe it is safe to continue investing and holding Tencent, as the title suggests: Tencent Q2 Earnings Review: Good, Keep Rising.
$TENCENT (00700.HK)$
As mentioned earlier, “Tencent, through its comprehensive internet ecosystem, continuously creates high-quality products to generate more revenue and profit. Given such excellent results during a period of macroeconomic volatility, Tencent's potential for growth is likely to be even greater once the economy recovers.” Moreover, in the closing remarks, it is stated: “We remain committed to the core principle of 'User First, Technology for Good.' We will continue to strive to create value for shareholders and society, while actively promoting innovations, meeting societal needs, and contributing to a sustainable future.” Therefore, we can expect that as Tencent’s business grows, it will likely continue to provide shareholder returns. For 2024, there was a significant buyback; if performance continues to improve, will 2025 see even more? Based on current market forecasts for 2024-2026, the expected Non-IFRS parent company’s net profit is between 210-270 billion yuan, with a compound profit growth rate of around 15%. Tencent’s valuation is currently at 3.19 trillion yuan. Given past shareholder returns, most of the rewards will likely be distributed to shareholders. Currently, shareholder returns are around 6-7% ((dividends + buybacks) / total market capitalization). With 15% compound growth, shareholder returns will reach a new level. Assuming Fed interest rate cuts and continued global economic recovery, Tencent is likely to grow beyond current levels. At its current valuation, it offers attractive shareholder returns, a robust moat, and strong growth. At this price, we believe it is safe to continue investing and holding Tencent, as the title suggests: Tencent Q2 Earnings Review: Good, Keep Rising.
$TENCENT (00700.HK)$
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