TENCENT(HK:00700) Zhao Yin Guo Ji·2024-05-15 03:22Investment Rating - The report maintains a "Buy" rating for Tencent with a target price of 480.0 HKD, up from the previous target of 445.0 HKD, indicating a potential upside of 25.7% from the current price of 381.80 HKD [3][8]. Core Insights - Tencent reported a 6% year-on-year increase in total revenue for Q1, reaching 159.5 billion RMB, aligning with expectations. Non-IFRS net income surged 54% year-on-year to 5.3 billion RMB, exceeding forecasts by 17% [3]. - The company's gross profit margin (GPM) expanded by 7.1 percentage points year-on-year, driven by high-margin revenue sources such as video accounts and mini-games. This trend is expected to continue throughout FY24 [3][4]. - The report anticipates a compound annual growth rate (CAGR) of 15% for non-IFRS net income from FY24 to FY26, with earnings forecasts raised by 6-8% [3][5]. Revenue Summary - Total revenue for Q1 was 159.5 billion RMB, with online advertising revenue increasing by 26% year-on-year to 26.5 billion RMB, driven by strong growth in WeChat advertising [4]. - Gaming revenue saw a slight decline of 1% year-on-year to 48.1 billion RMB, but domestic gaming revenue showed signs of recovery with a 3% increase in Q1 [3][4]. - Financial technology and business services (FBS) revenue grew by 7% year-on-year to 52.3 billion RMB, although this was below general expectations due to slower growth in fintech [5]. Profitability Metrics - The overall GPM for Q1 increased to 52.6%, with significant contributions from value-added services (VAS), advertising, and FBS segments [5]. - The report projects continued GPM expansion for the remainder of FY24, with non-IFRS net income expected to grow by 27% and 10% in FY24 and FY25, respectively [5]. Valuation Breakdown - The target price of 480.0 HKD is derived from a sum-of-the-parts (SOTP) analysis, which includes valuations for various business segments such as online gaming, social networking services, advertising, fintech, and cloud services [12][13]. - The valuation for the online gaming business is set at 182.0 HKD based on a 19x PE ratio, while the advertising business is valued at 85.6 HKD based on an 18x PE ratio [12][13].