Date of Report
Thursday, 03 October 2024
Broker Name
UOB Kay Hian
Gaming Segment Rebound
Tencent’s domestic gaming revenue is experiencing a strong rebound, driven by the continued success of evergreen games and the incremental contribution of its newly launched game, DnF Mobile. Since its launch on 21 May 2024, DnF Mobile has generated an estimated RMB 5 billion in revenue in its first month and continues to perform well. This momentum is expected to contribute RMB 15 billion in incremental grossing during the first 12 months of its launch.
Promising Growth in 2H24
Tencent’s deferred revenue increased by 20% year-on-year (yoy) to RMB 106.9 billion in 2Q24, signaling a promising growth outlook for the second half of 2024. Domestic games revenue rose by 9% yoy in 2Q24, driven by contributions from DnF Mobile and other revitalized evergreen game titles. Meanwhile, international gaming revenue also saw a 9% yoy increase during the same period.
Online Advertising Revenue Expansion
Tencent’s online advertising revenue grew by 19% yoy to RMB 29.9 billion in 2Q24. This growth was primarily driven by strong demand for video accounts and long-form video advertisements. The company expects its advertising growth to continue, fueled by the integration of AI and further development of its video account ecosystem.
AI Integration and Research & Development Focus
Tencent is also focusing on integrating AI into its business, aiming to balance its investment in AI with margin expansion. In 2Q24, Tencent launched its AI assistant application, Yuanbao, which is equipped with advanced natural language processing, image understanding, and AI search capabilities. The company expects research and development (R&D) expenses to grow by high single digits in 2024 while keeping general and administrative costs excluding R&D at single-digit growth.
Valuation and Target Price
UOB Kay Hian maintains a “BUY” rating for Tencent, with a higher target price of HK$570.00. The stock is currently trading at 17.7x 2025 forecast price-to-earnings (PE) ratio, which is below its historical mean of 26x. The revised target price reflects a 21.5x 2025F PE, highlighting Tencent’s growth potential in gaming, advertising, and AI-driven initiatives.
Catalysts for Share Price Growth
Key catalysts for Tencent’s share price growth include improving online advertising performance, particularly through its WeChat video account, as well as the approval of new game licenses. Furthermore, Tencent’s ongoing collaborations with various internet platforms within the WeChat ecosystem are expected to support long-term growth.
Timeline for Growth
Investors can expect significant growth momentum for Tencent in the second half of 2024, particularly as its domestic gaming revenues continue to rise and advertising revenue expands. The company’s focus on AI integration and operational efficiency will also contribute to its overall growth.
Investment Outlook
Tencent is well-positioned for growth across multiple segments, with a strong rebound in gaming, robust advertising revenue, and promising developments in AI. Its diversified business model and competitive positioning in key markets make it an attractive investment opportunity for those looking for long-term growth in China’s technology and entertainment sectors.
