Text and Image | Tang Jie

In the second quarter, Tencent's overall performance was quite impressive, aside from a slight shortfall in revenue compared to market expectations. However, Tencent's share price has struggled recently amid Hong Kong's liquidity crunch, despite two consecutive quarters of exceeding market expectations and significant share repurchases. This earnings report serves as a shot in the arm for the market and Tencent bulls.

Summary of Key Points:

1. Among all financial indicators related to revenue, Tencent's gaming business showed the most significant deviation from expectations, generating RMB 48.5 billion in revenue in Q2, 2.5% higher than consensus forecasts. DNF contributed the most, exceeding all expectations (including ours) with its performance, topping the best-selling charts for two consecutive months, proving that gameplay and nostalgia can still drive player spending. 2. The launch of new games significantly boosted sales expenses in the quarter, up 10% YoY and over 20% QoQ. Despite the increase, Tencent's profitability remained strong, with net profit reaching RMB 47.6 billion, up 82% YoY and 19.2% above consensus. Based on the August 14 closing price of HKD 373.8, TTM PE fell from around 20x before the report to around 18x now. 3. The liquidity crunch in Hong Kong is the primary reason for Tencent's recent share price weakness. However, from another perspective, this is an excellent opportunity to accumulate shares. With the near-certainty of a Fed rate cut in September, the resulting liquidity should benefit Hong Kong stocks, and Tencent could be among the first to rally when the market turns around.

In the broader Hong Kong market, only Tencent combines the dual advantages of platforms and content, with a high degree of complementarity evident in its financial reports.

By 'platforms,' we mean WeChat and QQ, the two leading Chinese social media platforms. 'Content' refers to 'games + videos + music,' providing quality entertainment while monetizing for Tencent. With these two strengths, Tencent is poised for full-year revenue growth of 5-10%, outpacing GDP growth.

Tencent's monetization efficiency on the content side has consistently been higher than on the platform side. This is evident in Tencent's approach to WeChat, where they intentionally limit commercial content. However, since focusing on video numbers, platform-side revenue and monetization efficiency have significantly improved, underpinning Tencent's valuation.

Tencent's gaming revenue was particularly impressive in Q2 2024, reversing two consecutive quarters of negative growth to reach RMB 48.5 billion. Domestic game revenue grew 9% YoY, while overseas revenue maintained its strong performance with a similar 9% growth.

Domestic games benefited from continued contributions from old hits like Honor of Kings, Game for Peace, Teamfight Tactics, and Naruto Online, which ranked high in sales charts in H1. New games like Yuanmengzhixing performed steadily, while DNF surged, topping the charts for two months.

Regarding DNF's performance, we were initially skeptical due to its graphics and operation. However, Tencent's aggressive marketing has kept DNF's revenue high since launch, topping the charts for two months. This success underscores Tencent's ability to understand player preferences, execute marketing and operations, and leverage strong distribution channels.

Turning to platforms, Tencent's advertising revenue reached RMB 29.9 billion, up 19% YoY. While this growth was lower than the previous quarter's 26% YoY, it remains impressive given the large base. Advertising offers significant profit margins, and maintaining over 15% growth will further boost profitability.

The increasingly active WeChat ecosystem significantly contributes to Tencent's advertising revenue. Mini-program user time grew over 20% YoY, and mini-game monthly revenue surpassed 30% YoY, becoming key growth drivers. AI-optimized ads improved conversion rates and revenue quality. Overall, Tencent's advertising revenue far exceeds its marketing expenses (RMB 9.2 billion), indicating healthy business growth.

Finally, Tencent's net profit reached RMB 47.63 billion, up over 80% YoY. Based on the latest closing price, TTM PE fell from around 20x before the report (adjusted net profit basis) to around 18x, highlighting Tencent's value proposition.

Furthermore, with Tencent's significant share repurchases, the impact of major shareholder Naspers' roughly 2.27 billion shareholding on Tencent's capital position is minimal. The recent share price weakness is primarily due to the liquidity crunch. As the Fed rate cut materializes and new liquidity flows into Hong Kong stocks, Tencent, already offering good value, could lead the turnaround.

Disclaimer: This article is for learning and exchange purposes only and does not constitute investment advice.