Tianfeng Securities issued a research report stating that it maintains a 'buy' rating on Tencent Holdings (00700), and raises its forecast Non-IFRS net income attributable to equity holders of the Company for years 2024-2026 to CNY 204.7 billion, CNY 235.6 billion, and CNY 264.8 billion, respectively, with a target price of HKD 476. The company's gaming business has shown a clear upward momentum in growth, with gross margin improvement continuing to exceed market expectations, and market profit expectations entering an upward trend. The bank expects further potential for improvement in the future. In the long run, active deployment of AI technology development and a diversified product matrix correspond to a wide range of potential application combinations, and technological progress may become an important growth multiplier in the medium to long term.

According to the report, the company showed a clear trend of game growth rebound in 1Q2024, as well as continuous and exceeding expected gross margin improvement. Market profit expectations have entered an upward adjustment channel. As of 2024/5/25, after the announcement of the company's 1Q2024 performance, institutions unanimously predict that the 2024/2025 Non-IFRS net income attributable to shareholders will be adjusted upward by RMB 12.2/10.9 billion (+7%/+5%) to RMB 196.8/221.0 billion, which implies that the institutional expectations for Non-IFRS net income attributable to shareholders in the second to fourth quarters of 2024 have been adjusted upward by approximately RMB 4.9 billion. Looking ahead, the bank believes that there is still further potential for upward adjustment of market profit expectations.

1) The bank believes that the current market expectations of gross margin may not fully reflect the favorable impact of changes in revenue structure. Currently, institutions unanimously predict that the gross margin for 2024 will be adjusted upward to 52.7%, with a limited increase compared to the level of 52.6% in 1Q2024. However, looking at the past few quarters, margin momentum driven by changes in revenue structure has been strong, and the medium-term growth potential of new growth sources, such as video and e-commerce advertising, mini games, financial value-added services, remains significant.

2) The bank believes that there is further potential for growth in game revenue expectations. On the one hand, the recently launched "Dungeon and Fighter: Origins" has performed well in the iOS bestseller list, and its annual revenue performance may exceed expectations. On the other hand, the outstanding performance of "PUBG Mobile" has driven a year-on-year increase of 34% in overseas game revenue in 1Q2024. Since April, its iOS ranking in key markets has further improved from 1Q, and the upcoming global launch of Supercell's new game "Squadbusters" will further boost revenue. The bank predicts that Tencent's overseas game revenue will increase by 14% year-on-year in 2024, while current institutional expectations for overseas game revenue in 2024 are only +11%, which may not fully reflect the trend of accelerated overseas game growth.