Source Research Report Alpha .
On March 20, 2024, TENCENT will announce its Q4 financial report for the 2023 fiscal year after the market closes. Despite facing pressure from the gaming business due to fewer new product launches and the high base of overseas markets, it is expected that TENCENT's overall revenue will continue to grow steadily, with the company's profitability continuing to unleash its potential. As of March 12, 2024, the company's stock price is 291.6 yuan.
I. Business Model Analysis
TENCENT's business can be divided into three main segments: Value-Added Services (VAS), Online Advertising, FinTech and Business Services, with the Value-Added Services segment being the company's main source of revenue, accounting for 49% of total revenue.
II. Continued High-Quality Growth, Focus on Gaming and Video Growth
According to Bloomberg's consensus forecast, TENCENT is expected to achieve the following in Q4 2023:
(1) Revenue of 155.4 billion yuan, a year-on-year increase of 7.2% and a quarter-on-quarter increase of 2.4%;
(2) Expected gross profit of 75.1 billion yuan, a year-on-year increase of 21.6% and a quarter-on-quarter increase of 0.1%, maintaining an optimizing trend;
(3) Expected net profit for Q4 2023 (Non-GAAP) of 40.9 billion yuan, a year-on-year increase of 37.8% and a quarter-on-quarter decrease of 7%.
According to Wind's consensus expectations, TENCENT is expected to achieve the following in Q4 2023:
(1) Revenue of 156.1 billion yuan, a year-on-year increase of 7.8% and a quarter-on-quarter increase of 3.1%;
(2) Expected gross profit of 73.6 billion yuan, a year-on-year increase of 19.2%;
(3) Expected net profit for Q4 2023 (Non-GAAP) of 40.3 billion yuan, a year-on-year increase of 35.7% and a quarter-on-quarter decrease of 6.7%.
Overall, the two sets of consensus expectations are similar, both making positive forecasts for TENCENT's performance in the fourth quarter.
Chart: Q3 2023 Revenue and Performance Forecast (in hundreds of millions)
<img src="https://pub.pbkrs.com/uploads/2024/9f5f8b2b0750f063844a1a1c419d7cfa?x-oss-process=style/lg" original-src="https://pub.pbkrs.com/uploads/2024/9f5f8b2b0750f063844a1a1c419d7cfa"/>
Source: Bloomberg
TENCENT's revenue growth rate has slightly slowed compared to Q3, due to high base numbers in financial data and content scheduling fluctuations. However, according to the latest quarterly TENCENT conference call content and Bloomberg's consensus expectations, the profit thickening brought about by the optimization of the business structure is expected to continue. The company will further focus on high-quality growth, with a rich reserve of new game content, continuing to unleash the company's profitability potential.
(1) It is expected that TENCENT's Value-Added Services revenue in Q4 2023 will be 71 billion yuan, an increase of 0.8%. Among them, gaming business revenue is 42.4 billion yuan, a year-on-year increase of 1.3%. In terms of domestic games, with fewer new game launches in Q4 and it being a commercialization off-season, revenue is expected to remain relatively stable
Q4TENCENT's core old products in the gaming sector, such as &#34;Honor of Kings,&#34; &#34;Peacekeeper Elite,&#34; and &#34;League of Legends Mobile,&#34; are expected to see a slight recovery compared to the previous period; however, due to the limited number of key new products both domestically and internationally, overseas performance is under pressure due to a high base, resulting in overall flat growth. It is estimated that the social networking revenue of the company in Q4 will be 28.6 billion yuan, maintaining stability year-on-year. The main reason is the impact of TENCENT's live streaming rules adjustment, but with the background of refined operations and increased user willingness to pay, there is a broad space for subscription services like music and long videos, which can offset the revenue loss from live streaming.
(2) It is expected that the advertising revenue of TENCENT in Q4 2023 will be 28.4 billion yuan, a year-on-year increase of 15%. As Q4 2022 was the first complete quarter of commercialization of TENCENT's Video Number information flow, the base was high, so the year-on-year growth rate of advertising in Q4 2023 is expected to slow down compared to the third quarter. In addition, TENCENT has deepened its advertising cooperation with Alibaba, and currently, WeChat Video Number, Moments, Mini Programs, etc., can directly link to Taobao, Tmall merchants' stores, product details, and Taobao live streaming rooms, which is expected to bring more e-commerce advertising revenue conversion to TENCENT.
(3) It is expected that the financial technology and enterprise services revenue of TENCENT in Q4 2023 will be 54.3 billion yuan, a year-on-year increase of 14%. In terms of financial technology, commercial payments are steadily growing, with a long-term focus on other financial businesses; in terms of enterprise services, the commercialization of SaaS products such as TENCENT Meeting and Enterprise WeChat continues to advance, commercialization of enterprise services accelerates, the rapid development of large models enhances the demand for enterprise cloud services, driving steady growth in cloud business.
Chart: Performance and growth expectations of TENCENT's various business segments
<img src="https://pub.pbkrs.com/uploads/2024/27ebbf388b28064bd51ac0c9b8f8466e?x-oss-process=style/lg" original-src="https://pub.pbkrs.com/uploads/2024/27ebbf388b28064bd51ac0c9b8f8466e"/>
Source: Bloomberg
III. Rich Gaming Reserves, Strong Performance in Video Marketing Worth Expecting
It is worth noting that in 2024, TENCENT has a rich reserve of games, with nearly 20 reserve products already obtaining licenses, including &#34;Need for Speed&#34; and &#34;Assassin's Creed,&#34; and some games have been launched in Q4 2023, performing well.
In terms of video apps, TENCENT Video has shown steady performance in online dramas and variety shows, ranking highest in the TOP10 hot drama and variety shows, expected to bring more revenue to the company in Q4. Works like &#34;Hidden,&#34; &#34;Miss You Very Much,&#34; and &#34;Return to the South China Sea&#34; respectively ranked 3rd to 5th in the Ai En Play Index Ranking for the fourth quarter of 2023, showing overall stable performance. In terms of online variety shows, TENCENT Video's produced variety shows occupied half of the top 10 in the Ai En Play Index Ranking for the fourth quarter of 2023. Among them, &#34;Heart-Pounding Offer Season 5&#34; ranked second, with a high Douban rating of 7.9, reaching a new high since the first season. Additionally, works like &#34;Depart Now&#34; and &#34;Mao Xuewang&#34; continue to attract widespread attention and discussion
In terms of video accounts, according to data from XINBANG, as of December 2023, the top 500 video accounts have published a total of 77,000 works, with a total of 400 million likes. The average likes per work published by the top 500 accounts is 5124, a 13% increase compared to the previous period. In December, there were 1406 works from the top 500 accounts that received over 100,000 likes, and 6 works with over 100,000 comments. In terms of live streaming, in December, 2 video accounts had a total viewership of over 20 million, and 4 video accounts had a total viewership of over 10 million. In December, four video accounts had a total sales volume of over 1 billion RMB, with the total sales revenue of &#34;FILA Official Flagship Store&#34; exceeding 2 billion RMB.
Table: 2023 Q4 Network Drama Popularity Ranking
<img src="https://pub.pbkrs.com/uploads/2024/3c966db0e93db1d62bf621ec02492b0b?x-oss-process=style/lg" original-src="https://pub.pbkrs.com/uploads/2024/3c966db0e93db1d62bf621ec02492b0b"/>
Source: EntGroup
IV. Summary
TENCENT is expected to achieve a revenue of 155.4 billion RMB in Q4 2023, a year-on-year increase of 7.2% and a quarter-on-quarter increase of 2.4%. This shows varying degrees of growth compared to the same quarter in 2022 and Q3 2023. The net profit (NonGAAP) for Q4 2023 is 40.9 billion RMB, a year-on-year increase of 37.8% but a quarter-on-quarter decrease of 7%. The decline from the third quarter is attributed to the bottoming out of value-added services, and it is expected to be relatively flat due to product pipeline impacts.
Overall, we remain skeptical about TENCENT's performance. The company is expected to continue unlocking potential in gaming and long videos, presenting some trading opportunities. However, due to significant differences between net profit and operating profit, market predictions for stock prices are expected to vary widely.
V. Risks
(1) Morgan Stanley's valuation of TENCENT's net profit is 38.245 billion RMB, a 64% year-on-year decrease. The reason may be the rapid decline in other operating income items in the profit statement disclosed by TENCENT, with significant losses in fair value changes of financial instruments totaling 2.1 billion RMB. Additionally, the net investment income in Q3 was only 800 million RMB, a 98% year-on-year decrease, which has a significant adverse impact on stock prices and requires cautious investment.
Table: Selected Notes from TENCENT's Q3 Profit Statement
<img src="https://pub.pbkrs.com/uploads/2024/b014bd608ecbccff1797f3c96c253018?x-oss-process=style/lg" original-src="https://pub.pbkrs.com/uploads/2024/b014bd608ecbccff1797f3c96c253018"/>
Source: Company Financial Report
(2) Changes in internet finance regulations may affect performance expectations and valuation levels. Since the second half of 2020, the China Banking and Insurance Regulatory Commission has introduced supervisory measures for small loan companies and businesses, as well as new regulations on payments, which may impact TENCENT's financial technology existing or new business expansions.
(3) Changes in gaming regulations may affect performance expectations and valuation levels. Market attention is focused on marginal changes in gaming-related regulatory policies. Games are a core profit contributor for TENCENT, with short-term focus on new product launches and long-term focus on overseas expansion. Regulatory policy changes will significantly impact performance expectations and valuation levels
(4) The macroeconomic recovery is below expectations. The Hang Seng Index showed a year-on-year decline trend in Q4 2023, indicating that the overall economy's downturn is likely to have a negative impact on TENCENT's core businesses such as content value-added services, advertising, payments, and cloud services

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According to Bloomberg's consistent forecast, TENCENT is expected to achieve the following in Q4 2023:
(1) Revenue of 155.4 billion RMB, a year-on-year increase of 7.2% and a quarter-on-quarter increase of 2.4%;
(2) Expected non-GAAP net profit for Q4 2023 of 40.9 billion RMB, a year-on-year increase of 37.8% and a quarter-on-quarter decrease of 7%

TENCENT Q4 Financial Report Preview: Rich Reserves of Gaming Content