Huaxing Securities: Raising the target price of Tencent Holdings (00700) to HK$520 to reaffirm the “buy” rating

The Zhitong Finance App learned that Huaxing Securities published a report stating that it switched to the 2025 forecast value and SOTP valuation, reaffirmed the “buy” rating of Tencent Holdings (00700) and raised the SOTP target price to HK$520.00 to maintain revenue forecasts for online advertising and fintech and corporate services. The Group's overall business environment remained stable during the 3Q24 period. Driven by “Dungeon and Warrior Mobile Games”, Evergreen Gaming and deferred revenue balances, the predictability of game growth improved.

The main views of Huaxing Securities are as follows:

Games:

The forecast for Tencent Online Gaming revenue growth of 13%/9% year-on-year for the third and fourth quarters of 2024, respectively, remained unchanged.

Local games: The bank expects revenue growth to accelerate to 12% year-on-year (-2%/+9% compared to the first and second quarters of 2024, respectively), driven by the strong performance of Evergreen Gaming and the continued strong player payments for “Dungeon and Warrior Mobile Game”. The bank believes that the recently released “Operation Delta” is a powerful addition to the existing shooter game portfolio. The game focuses on escape shooting, multiplayer battlegrounds, and upcoming story-mode campaigns. The bank expects domestic online game revenue to maintain double-digit growth over the next four quarters, driven by the steady performance of “Dungeons and Warriors Mobile”, Evergreen Gaming, and a record high 2Q24 deferred revenue.

International games: Supercell's old game “Brawl in the Wild” continued to perform well, ranking 10/8 in the US iOS streaming rankings in July/September (compared to 8/7 in May/June). At the same time, considering the recovery of “PlayerUnknown's Battlegrounds”, the bank expects that these games will drive international game revenue to increase from a 3%/9% year-on-year growth rate in the first and second quarter of 2024 to a 13%/23% year-on-year increase in the third-quarter 2024.

Online advertising:

Maintaining the forecast of a 15% year-on-year increase in online advertising revenue in 3Q24, social advertising revenue is expected to increase 16% year over year (unchanged), and media advertising revenue is expected to increase 6% year over year (lower than the previous 8%). According to the bank's research, products such as video ads will occupy a larger market share, so the bank continues to predict that Tencent's advertising growth rate will exceed the market level. The bank's downgraded media advertising forecasts mainly because 3Q24 Tencent Video lacked hit dramas. Total advertising revenue growth remained unchanged at 18% year-on-year in 2024.

Fintech and corporate services:

Maintain the forecast of a 3% year-on-year increase in revenue for this sector in 3Q24. Among them, the bank expects the revenue growth rate of fintech/corporate services to be 1.5%/11% year-on-year, respectively. The bank expects corporate services to maintain healthy revenue growth and profit margin performance.

Profitability:

The bank generally maintained the adjusted operating profit margin forecast for 3Q24/2024 at 36.9%/36.1%, with year-on-year increases of about 350/460 percentage points, respectively, and maintained the adjusted net interest rate forecast for the same period at 35.9%/34.0%, with year-on-year increases of about 680/810 percentage points, respectively. The bank predicts that optimizing the revenue structure towards high-profit businesses and operating expenditure methods focusing on ROI will help Tencent increase net profit. In terms of shareholder returns, as of October 9 this year, Tencent has repurchased approximately HK$91 billion worth of shares (4Q23 sets a target of repurchasing over HK$100 billion in 2024).

Risk warning: Monetization is slowing down and return on investment is low.