CICC: Maintains Tencent Holdings "Outperform Industry" Rating with a Target Price of HKD 600

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that based on the rapid growth of advertising and gaming revenue for Tencent Holdings (00700), the bank has raised its revenue forecasts for 2025/2026 by 2%/4% to RMB 730.8 billion/RMB 784.2 billion, while maintaining its Non-IFRS net profit forecasts for 2025/2026 largely unchanged. The rating is maintained at "Outperform" with a target price of HKD 600, corresponding to 19.9x/17.5x 2025e/2026e Non-IFRS P/E, indicating a 15% upside potential. The current stock price is trading at 17.3x/15.2x 2025e/2026e Non-IFRS P/E.

CICC's main points are as follows:

Q1 2025 revenue and Non-IFRS net profit both exceeded the bank's expectations

Tencent's Q1 2025 revenue increased by 13% year-on-year to RMB 180 billion, exceeding the bank's expectations by 2.4% and market expectations by 2.5%, mainly due to better-than-expected gaming and advertising revenue; Non-IFRS net profit increased by 22% year-on-year to RMB 61.3 billion, exceeding the bank's expectations by 1% and market expectations by 3%, with strong profit performance mainly due to several business segments' gross margins exceeding expectations.

Gaming revenue growth significantly exceeded market expectations

The company's Q1 2025 gaming revenue increased by 24% year-on-year to RMB 59.5 billion, exceeding the bank's expectations by 7%. Among this, overseas gaming revenue increased by 23%, with strong performances from games like "Brawl Stars," "Clash Royale," and "PUBG Mobile"; domestic gaming revenue also increased by 24%, driven by games such as "Honor of Kings," "Peacekeeper Elite," "DNF M," and "Delta Operation." The company's evergreen gaming base remains solid, and in recent years has benefited from the rapid growth of the first-person action (FPA) genre in the domestic market. The bank expects Q2 2025 gaming revenue to increase by 17%, with an expected annual growth of 16%.

Advertising slightly exceeded expectations, with a clear long-term growth trend

The company's Q1 2025 advertising business revenue increased by 20% year-on-year to RMB 31.9 billion, exceeding the bank's expectations by 4%. The performance of video accounts, mini-programs, and WeChat search ads was good, with video account advertising revenue growing by over 60% year-on-year. The company also stated that it upgraded its advertising technology platform by enhancing generative AI capabilities, enabling ad material production, digital human live streaming, and improving recommendation effectiveness. The bank expects Q2 2025 advertising revenue to increase by 17%. Additionally, Q1 2025 revenue from financial and enterprise services increased by 5%, with the bank estimating that fintech revenue grew by 3% (mainly relying on loans and wealth management), while commercial payment revenue still saw a slight year-on-year decline; the bank estimates that Q1 2025 enterprise service revenue increased by 13%, with contributions from cloud computing and video account e-commerce technology service fees.

Significant year-on-year improvement in gross margins across multiple business segments

In Q1 2025, the company's gross margin improved by 3.2 percentage points year-on-year, mainly due to the rapid growth of VAS (high-margin domestic gaming revenue) and improvements in FBS business gross margins (both enterprise services and payment businesses improved margins) which increased by 2.3 percentage points and 4.7 percentage points year-on-year, respectively. In terms of expense ratios, the sales expense ratio for Q1 2025 was 4.4%, down 0.4 percentage points year-on-year; the management expense ratio was 18.7%, up 3.1 percentage points year-on-year, with a one-time share-based compensation expense of RMB 4 billion due to the restructuring of overseas subsidiaries impacting this quarter Due to the overall good performance of the gross profit margin, the Non-IFRS operating profit in Q1 2025 increased by 18% year-on-year, and the Non-IFRS net profit increased by 22% year-on-year. In terms of CAPEX, the company invested HKD 27.5 billion in capital expenditures in Q1 2025, a year-on-year increase of 91%. The company stated that the operational leverage brought by high-quality revenue can effectively absorb the costs of AI investments; however, there is a lag in the commercialization of AI (GPU depreciation costs will precede the progress of AI commercialization), so the gap between the year-on-year growth rates of subsequent revenue and operating profit will narrow. Regarding shareholder returns, the company repurchased a total of HKD 17.1 billion in shares in Q1 2025 (21% of the annual repurchase plan has been completed in Q1 2025).

Risk Warning: Regulatory risks; new game launches may not meet expectations; costs or expense ratios may be higher than expected