Tencent's ambition: The strategic offensive horn has sounded, with 5x investment returns in 10 years, the future is promising.
This article was originally published in the "Snowball Reference June Issue" magazine, with slight adjustments.
Tencent Holdings recently released its Q1 2024 report, with Non-IFRS net profit increasing by 54% year-on-year to RMB 50.265 billion, significantly exceeding market expectations. Meanwhile, quarterly revenue, gross margin, and net profit margin all hit five-year highs, and ROE also rebounded from its bottom at the end of 2023.
All these operational indicators show that Tencent has emerged from the difficulties of the past few years, regained high-quality growth, and dispelled previous market concerns about its transition from a growth stock to a low-growth utility stock.
This article will conduct an in-depth analysis of the reasons behind Tencent's Q1 earnings beat and explore the development prospects of high-potential businesses such as Video Accounts, Mini Games, WeChat Search, and FinTech. Finally, it will estimate Tencent's long-term investment returns from three perspectives: earnings growth, valuation improvement, and share buybacks.
1. Attribution Analysis of Q1 Earnings Beat
First, let’s briefly review Tencent’s latest financial performance. In Q1 2024, Tencent achieved revenue of RMB 159.5 billion, up 6% year-on-year, slightly higher than the market's expected 5%.
Non-IFRS net profit attributable to shareholders reached RMB 50.3 billion, surging 54% year-on-year, surpassing even the most optimistic analyst forecast of 36% growth.
In terms of revenue, Q1 revenue of RMB 159.5 billion set another quarterly record, but the year-on-year growth rate slowed to single digits for two consecutive quarters. This was partly due to the gaming business being in an adjustment phase (zero growth in Q1) and FinTech services facing headwinds from weak consumption (single-digit growth).
As the gaming business stabilizes and the macroeconomy gradually improves, Q2 revenue growth is expected to rebound to over 10%.
Regarding net profit, since resuming growth in Q3 2022, Tencent's Non-IFRS net profit has grown positively for seven consecutive quarters, with accelerating growth rates. The 54% year-on-year growth in Q1 2024 set a new five-year record, reflecting significant improvements in operational efficiency.
Analysis shows that Tencent's high net profit growth in Q1 was driven by four factors: higher-margin product mix, lower operating costs, improved management efficiency, and a turnaround in joint venture profits:
1) Gross margin rose significantly from 45% to 53%, mainly due to the increased contribution of high-margin products like Video Accounts ads, WeChat Search ads, and Mini Games. This optimized revenue structure makes profitability more robust and sustainable.
2) While high-margin revenue grew sharply, operating costs fell 8% year-on-year, attributed to lower content costs for Tencent Video and reduced cloud deployment expenses. Most of Tencent's businesses are already cloud-based, meaning upfront investments have been made—like a mall already built, where subsequent revenue is almost pure profit.
3) Management expense ratio dropped 5% year-on-year, with headcount slightly declining from 105,400 to 104,700, indicating continued cost-cutting and efficiency improvements.
4) Tencent's share of profits from joint ventures reached RMB 5.5 billion in Q1, a sharp improvement from a RMB 100 million loss a year ago. Excluding this, Non-IFRS net profit grew 37%, a more normalized figure.
2. From Extensive to High-Quality Growth
2021 marked a watershed for China's internet industry. Starting from Jack Ma’s controversial speech in Shanghai in October 2020, the sector underwent a two-year deep adjustment involving compliance, competition norms, and user rights protection.
Against this backdrop, Tencent reevaluated its past growth model, which sacrificed quality for speed, and shifted to strategic contraction—refocusing on core businesses and implementing cost-cutting measures for sustainable, high-quality growth.
After two years of painful adjustments, Tencent’s business units have completed repositioning and efficiency improvements. Former loss-makers like Tencent Video, Tencent News, and cloud services have reduced losses or turned profitable. These changes began bearing fruit in 2023.
Tencent’s strength lies in its WeChat and QQ ecosystems: even if certain businesses (e.g., gaming, cloud) underperform, new growth drivers inevitably emerge. Below, we highlight several high-potential "sprouts."
3. Video Accounts: Leading Tencent’s Strategic Offensive
Since Douyin’s (TikTok’s Chinese version) rise in 2016, it has encroached on Tencent’s user time, threatening WeChat and QQ’s dominance. Tencent’s countermeasures—launching its own short-video app, investing in Kuaishou, and restricting external links—were largely ineffective until Video Accounts debuted in 2020.
Video Accounts hit 200 million daily active users (DAU) within six months. By Q1 2023, user time spent surpassed Moments (WeChat’s social feed). In Q2 2023, Tencent disclosed Video Accounts ad revenue exceeded RMB 3 billion, contributing over 10% to total ad revenue.
Thus, with Video Accounts’ rise, the pressure shifted to Douyin, and Tencent transitioned from defense to offense, capturing some of Douyin’s market share.
Since H2 2023, Video Accounts has driven incremental ad and enterprise service revenue. In Q1 2024, total user time surged 80% year-on-year, showing strong momentum.
Management revealed Video Accounts’ ad load rate is just one-fourth of industry averages, leaving ample room for growth. Meanwhile, live-streaming e-commerce is a 2024 priority to further monetize the platform.
All signs indicate Video Accounts’ contribution is still in early stages, with more upside expected in the next two years.
4. Mini Games: Now a Major Business
Mini Games, another "sprout" from WeChat’s fertile soil, are recorded under social networks and online ads (not gaming revenue) but are Tencent’s fastest-growing gaming segment and a high-CPM ad source.
Per QuestMobile, WeChat Mini Games’ MAU exceeded 750 million—now a major business.
Tencent didn’t disclose Mini Games’ revenue in Q1 but noted a 30% year-on-year increase in gross transaction volume (GTV), slowing from Q4 2023’s 50% but still rapid.
China’s Mini Games market reached RMB 40 billion in 2023 and is expected to exceed RMB 60 billion in 2024. As the industry leader with ~70% share, Tencent’s 2023 GTV likely hit RMB 28 billion (close to our estimate of RMB 31 billion).
As the platform, Tencent takes a 30%-40% cut (~RMB 10 billion net). Mini Game developers also buy ads from Tencent’s ad network, adding significant ad revenue. Total 2023 net income (IAP + IAA) likely reached RMB 12-13 billion—higher than most A-share gaming firms’ annual revenue.
With ~500 million MAU (50% of WeChat’s user base), penetration is high. However, competition from Douyin, Meituan, and Alipay may slow 2024 growth to 25%-30%.
5. WeChat Search: Huge Growth Potential
Another "sprout" is WeChat Search ("Sou Yisou"). In Q1 2024’s earnings call, Pony Ma and Martin Lau highlighted its importance as a high-quality revenue source.
WeChat Search sits atop WeChat’s main interface and in the Discover tab. Initially limited to chat history and contacts, it now covers broader queries as WeChat’s ecosystem (Mini Programs, Video Accounts) expanded.
Consider: When you need to search while using WeChat, is it easier to switch apps or search within WeChat? Most would choose the latter—a natural advantage over Baidu or Douyin.
At WeChat’s 2023 Open Class, monthly active users (MAU) hit 800 million (+54% year-on-year in searches), surpassing Baidu App’s 600 million MAU and Douyin’s 550 million video search MAU.
WeChat Search launched ads in November 2022, entering Baidu’s turf. Compared to Baidu’s 2023 ad revenue of RMB 75.1 billion, WeChat Search’s higher MAU suggests vast potential—though user habits and execution will determine its share.
At the earnings call, JP Morgan asked about WeChat Search’s monetization. CSO James Mitchell said usage and queries are growing healthily, but commercialization remains light, having only started last year.
Given WeChat’s engagement and expanding content (Official Accounts, Mini Programs, Video Accounts), WeChat Search’s monetization is still early-stage with long runway.
6. FinTech: Steadily Returning to Fast Lane
Tencent’s Q1 report highlighted rapid growth in wealth management users and average investment size—a rare mention in recent years.
FinTech mainly comprises WeChat Pay (commercial payments) and wealth services (e.g., Licaitong). Q1 revenue rose 7% year-on-year to RMB 52.3 billion, slowing sharply from Q4 2023’s 15% due to weak offline spending and lower withdrawal fees, though wealth services grew strongly (albeit small share).
Licaitong traditionally focused on low-risk money funds but is now promoting bond funds. WeChat’s "Fenfu" (buy now, pay later) saw modest growth, with Tencent’s micro-lending arm reporting 346.88% net profit growth (albeit from a low base).
After years of strict fintech regulation, Tencent’s recent RMB 15.3 billion capital injection into its payment unit signals normalization. We expect its financial holding license approval soon for steadier growth.
7. Trillion-Yuan Investment Portfolio: A Potential Harvest Year
In 2024, Tencent’s nearly trillion-yuan investment portfolio may surprise.
As of Q1, its listed investments were valued at RMB 522.4 billion, with unlisted investments at RMB 328.8 billion (total: RMB 851.2 billion).
Most investees are internet firms that, post-regulatory crackdowns, have cut costs and focused on core businesses, boosting profits. Q1 profit from joint ventures hit RMB 5.5 billion (vs. RMB 100 million loss a year ago), with full-year growth expected.
Meanwhile, Chinese internet stocks have rebounded (>20% YTD), lifting Tencent’s gains. Management also stated it won’t expand investments further, instead prioritizing buybacks/dividends.
8. 10-Year Investment Return: 5.5x
A previous deep-dive compared Tencent in 2022 to Apple in 2016—both with stellar ecosystems (iOS/WeChat), temporary woes, low valuations (10x P/E at troughs), and major shareholder selloffs (Carl Icahn/Naspers).
Apple’s 10x return over a decade stemmed from: 1) 7% annual profit growth (doubling in 10 years), 2) P/E expansion from 11x to 30x, and 3) 40% share count reduction via buybacks.
Tencent plans 2024 buybacks of HKD 100 billion and dividends of HKD 32 billion. Assuming flat shares, annual buybacks could shrink shares by 2.9% (29% over 10 years).
Assuming 10% annual profit growth (2.59x in 10 years) and P/E rising from 16.7x to 25x (50% uplift), total return = (2.59 / 0.71) * 1.5 = ~5.47x (18.5% annualized).
If profits grow 12% annually (3.1x in 10 years), return = (3.1 / 0.71) * 1.5 = ~6.56x (20.7% annualized). (End)
【Disclaimer】This content is for personal investment/research only, not investment advice. Trade at your own risk.
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$TENCENT(700.HK)
Source: Wei Wei Kunlun Xia
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