CICC: Maintain TENCENT(00700) "Outperform" rating with a target price of HK$468.

CICC released a research report stating that it maintains a "outperform" rating on TENCENT (00700). Due to changes in tax rates and equity affiliate earnings, the Non-IFRS net profit for 2024/2025 has been raised by 3% and 2% to 224.1/254.4 billion yuan, with a target price of 468 Hong Kong dollars. The company's revenue in 3Q24 increased by 8% to 167.2 billion yuan, which is basically in line with the bank's and market expectations; Non-IFRS operating profit increased by 19% to 61.3 billion yuan, exceeding the bank's expectations by 2.3% and basically meeting market expectations, with a significant increase in gross profit margin year-on-year; Non-IFRS net profit increased by 33% to 59.8 billion yuan, exceeding the bank's expectations by 8% and market expectations by 10%, with a lower effective tax rate for the quarter. CICC's main points are as follows: Continued acceleration in gaming. The company's gaming revenue in 3Q24 increased by 13% to 51.8 billion yuan, with overseas gaming revenue increasing by 9%, and strong performances from games including "PUBG MOBILE" and Supercell's "Brawl Stars"; domestic gaming revenue increased by 14%, driven by games including "DNF M", "Valorant", "Honor of Kings", and "Peace Elite". The bank believes that Tencent's current core strategic shift to potential Evergreen games (such as concentrating efforts to adjust the IEG organization) is conducive to concentrating resources to explore its own strengths to a greater extent, allowing Evergreen games to unleash stronger commercialization capabilities. Looking ahead, the gaming revenue amortization rules can support Tencent's significant growth in gaming revenue in 2H24 and 1H25, with the bank forecasting a 19% year-on-year growth in gaming revenue in 4Q24. Stable advertising business, weak financial business. The company's advertising revenue in 3Q24 increased by 17% to 30 billion yuan, with good performances from Video Number (which increased by over 60%), mini programs, and WeChat search ads. By industry, gaming and e-commerce advertising placements were relatively active. The company indicated that it is using a generalized AI model to promote the classification and tagging of advertising content materials and upgrading the machine learning platform to provide more accurate advertising targeting. Looking ahead, considering that the macro environment has not significantly improved and the high base of growth from last year, the bank believes that the year-on-year growth rate in advertising revenue in 4Q24 will slow to 12%. In addition, the financial and enterprise services revenue in 3Q24 only increased by 2% year-on-year - financial revenue remained flat (with payment revenue declining year-on-year), only wealth management services revenue achieved year-on-year growth. However, the company stated that payment trends improved in October. The bank estimated a 12% year-on-year increase in enterprise service revenue in 3Q24, with contributions from cloud computing and Video Number e-commerce technology service fees, and AI computing-related revenue exceeding 10% of IaaS revenue. The bank expects a 3% year-on-year increase in financial and enterprise services revenue in 4Q24. Margin decreased quarter-on-quarter in 3Q24. The company's gross profit margin in 3Q24 decreased by 0.3 percentage points quarter-on-quarter, marking the first decrease in gross profit margin in the past 6 quarters. Specifically, the advertising gross profit margin experienced a significant decline due to one-time costs related to Olympic content; VAS and FBS business gross profit margins performed relatively well. Operating profit increased by 19% in 3Q24, meeting market expectations, and with factors such as tax rate changes, Non-IFRS net profit increased by 33%, exceeding market expectations by 10%. The bank expects the company's Non-IFRS net profit to increase by 33% in 4Q24. In terms of repurchases, the company is continuing its previously announced HK$100 billion repurchase plan for the year, stating that it has the ability and willingness to continue returning value to shareholders and will announce a shareholder return plan for 2025 at the next performance meeting. Risks: Regulatory risks; new game launches falling short of expectations; costs or expense rates higher than expected.