Tencent Is Improving Advertising With AI

Core Viewpoint - Tencent is leveraging artificial intelligence (AI) to enhance its online advertising segment, leading to significant improvements in ad targeting, click-through rates, and overall revenue growth [2][3][10]. Group 1: Advertising Segment Performance - Tencent's advertising gross margin for 4Q23 was 56.8%, surpassing the overall gross margin of 50% [4]. - The gross profit from online advertising has increased from RMB 14,853 million in 2017 to RMB 51,344 million in 2023, indicating strong growth in this segment [6]. - The company anticipates a substantial financial benefit from AI in advertising, estimating a potential RMB 10 billion increase in revenue with a 10% improvement in click-through rates [10]. Group 2: AI Impact on Advertising - AI is expected to significantly enhance ad targeting, with click-through rates potentially exceeding 1% as large language models are deployed [3]. - Senior Executive VP James Mitchell noted that improvements in click-through rates could lead to an operating profit increase of RMB 8 billion, with some inventories experiencing a 100% increase in click-through rates over the past 18 months [10]. Group 3: Capital Allocation and Shareholder Returns - Tencent plans to double its share repurchases in 2024 from HKD 49 billion in 2023 to over HKD 100 billion, alongside a proposed 42% increase in annual dividends to HKD 3.40 per share [11]. - The company has returned substantial capital to shareholders, with a total distribution in kind of $30.2 billion (approximately RMB 219 billion) over the past two years [13]. Group 4: Valuation Insights - Tencent's fair value of shareholdings in listed investee companies was approximately RMB 551 billion (USD 78 billion) as of December 31, 2023 [13]. - The adjusted free cash flow for 2023 is estimated at RMB 144.2 billion (about $20 billion), with the operating businesses valued between $360 billion and $400 billion [16].