EB Securities: Maintains "buy" rating on Tencent (00700) with a target price of HKD 430.

EB SECURITIES has released a research report stating that they maintain a "buy" rating on Tencent (00700) with a target price of HKD 430. The bank pointed out that the company's non-IFRS net profit in 3Q23 grew significantly, higher than expected, due to factors such as increased revenue from mini-program games, video ads on WeChat, and live-streaming e-commerce. They maintain a positive outlook on the company's performance, expecting a cyclical recovery and continued optimization of operating leverage. They have raised their non-IFRS net profit forecast for the company for 2023-2025 to CNY 154.33 billion, CNY 184.35 billion, and CNY 204.23 billion respectively, representing an increase of 2.5%, 4.3%, and 3.1% compared to their previous forecast. The current price corresponds to a P/E ratio of 19/16/14. The bank is optimistic about the continuous optimization of the company's WeChat content ecosystem and the release of advertising traffic value. They expect new core casual and IP products to release higher-than-expected incremental growth under the normalization of game approvals. They also believe that there is significant potential in various business lines of the company, such as the commercialization of WeChat's internal circulation, abundant reserves of domestic and overseas games, and the potential of the large-scale AI graphics computing (AIGC) model to drive efficient operations and product upgrades. On November 15, Tencent announced its 3Q23 earnings. The company achieved revenue of CNY 154.63 billion (vs Bloomberg consensus estimate of CNY 154.80 billion), a year-on-year growth of 10%. The gross profit margin was 49.5%, a year-on-year increase of 5.2 percentage points. Non-IFRS net profit was CNY 44.9 billion (vs Bloomberg consensus estimate of CNY 39.9 billion), a year-on-year increase of 39%. The non-IFRS net profit margin was 29.1%, an increase of 6.0 percentage points. Commenting on the results, the number of monthly active users on the WeChat platform continued to grow steadily, and video accounts made significant contributions to usage time. The total monthly active accounts for WeChat and Weixin in 3Q23 reached 1.34 billion, a year-on-year increase of 2%. The commercialization of the WeChat ecosystem and the flourishing development of community content have accelerated. In 3Q23, the total video views on WeChat increased by over 50%, and advertising revenue from the WeChat ecosystem increased by over 30%, contributing more than half of WeChat's advertising revenue. EB SECURITIES' views are as follows: Domestic gaming revenue in 3Q23 was CNY 32.7 billion, a year-on-year increase of 5%. New games such as "Arknights," "A Certain Magical Index: Imaginary Fest," and "MapleStory: Cygnus Knights Edition" contributed to the revenue growth. Overseas gaming revenue was CNY 13.3 billion, a year-on-year increase of 14%. Strong performance of games such as "Honkai Impact 3rd: Nian," "Triple Match 3D," and "VALORANT" boosted the overall performance. Abundant reserves of domestic and overseas products and warming game approvals will accelerate the launch of new games, such as "A Certain Magical Index: Imaginary Fest" and "Arknights," in 3Q23, which may release incremental performance beyond expectations. Social network revenue in 3Q23 was CNY 29.7 billion, flat year-on-year. 1) The number of Tencent Video's paying subscribers in 3Q23 decreased by 3% YoY to 117 million, with a QoQ increase of 1%. The continued emergence of high-quality content such as "Unforgettable Love: Season 1" and "Romantique Desire" helps build long-term competitive barriers in content creation. 2) Overall revenue of TME (Tencent Music Entertainment) was under pressure due to the adjustment of its live-streaming function, but online music service revenue was up 42% YoY, and net profit growth was strong. Advertising revenue in 3Q23 was CNY 25.7 billion, a year-on-year increase of 20%, benefiting from strong demand for WeChat search ads, video ads, and mobile advertising alliances, especially from the local services and fast-moving consumer goods industries. On the supply side, the commercialization of the WeChat ecosystem continues to accelerate, providing advertisers with community and short video content. On the demand side, with the rational recovery of the macro economy and offline consumption, there is a strong rebound in advertiser demand. Financial technology and enterprise service revenue in 3Q23 was CNY 52.0 billion, a year-on-year increase of 16%, driven by the recovery of commercial payments by Wuxi Online Offline Communication Information Technology Co., Ltd. and the growth of wealth management services. The growth rate of enterprise service revenue in 3Q23 was higher than that of 2Q23, benefiting from the optimization of cloud service business structure and an increase in technology service fees for video ads on WeChat. Tencent's self-developed large language model "Hunyuan" has been released, expected to drive transformation in Tencent Meeting and document services. Risk factors include regulatory uncertainty, macroeconomic risks, underperformance of games, and increased competition.