Earnings Alert:2Q22 revenue declined by 3%, below consensus; Expect earnings to gradually recover in 2H22
• Revenue declined by 3% y-o-y to Rmb134bn in 2Q22, slightly below market expectations
• Non-IFRS net profit fell by 17% y-o-y, better than consensus thanks to better cost control
• Revised down non-IFRS net profit by 3%/ 5% for FY22F/ FY23F, factoring in slower revenue growth
• Maintain BUY with revised TP of HK$432 as we rolled valuation to FY23 and lowered target PE to 20x (vs 25x previously)
2Q22 results highlights
– Revenue declined by 3% to Rmb134bn, slightly below market expectations.
– Segment-wise, online game revenue decreased by 1% to Rmb42.5bn, missing market expectations. In terms of geographical performance, domestic game revenue decreased by 1% to Rmb31.8bn due to fewer big games released during the period. International game revenue declined by 1% to Rmb10.7bn, due to the high base effect and less time spent on games after reopening post Covid.
– FinTech and business services (FBS) revenue increased by 1% to Rmb42.2bn, slightly below market expectations.
– Online ad revenue decreased by 18% to Rmb18.6bn, with social ads down by 17%, while brand ads decreasing by 25%. The continued weakness was mainly due to soft demand from Internet services, education, and finance sectors.
– Gross profit decreased by 8%, with the margin contracting by 2ppts y-o-y to 43%, dragged by increased server and content costs on Video Accounts.
– Non-IFRS net profit decreased by 17% to Rmb28.1bn, better than market expectations of c.20% decline, mainly due to lower marketing expenses and better cost control in contents.
Outlook
– The sluggish revenue growth was due to slower games growth and weak performance in Fintech business.
– The weak growth of FBS in 2Q22 was caused by weak commercial payment volume due to the resurgence of Covid in Apr and May. Management disclosed that commercial payment activities has resumed to high-teens growth year-on-year in June 2022. We expect FBS to resume double-digital growth in 2H22.
– We expect online game growth will take some time to reaccelerate given fewer big titles to be released in the domestic market and more challenging environment in the overseas market this year. We are confident on Tencent’s games growth in the medium-to-long term, supported by its strong track record of launching blockbuster games and good industry knowhow.
– Online ads segment has been severely impacted by regulatory changes and weak macro since 3Q21, while underlying ads demand has seen moderate improvement since Jun22. We expect ads growth will gradually recover in 2H22. Besides, Tencent began rolling out Video Accounts infeed advertisements in Jul which should offer long-term growth potential for ads.
– We trimmed our 2022F and 2023F revenue forecast by 4% and 6%, respectively, factoring in slower growth on games and fintech and business services. Thus, we have revised down our non-IFRS net profit by 3% and 5% for FY22 and FY23 respectively, to reflect the slower revenue growth. However, we remain bullish on the mid-long term monetisation potential of the WeChat ecosystem like Video accounts as well as overseas game business.
We have rolled our valuation forecast to FY23 and lowered our PE multiple from 25x to 20x, -0.5xSD below its historical average, reflecting a more uncertain industry outlook.
We maintain BUY with revised TP of HK$ 432, based on SOTP methodology: (1) 20x FY23F core earnings (HK$357) and (2) Fair value of listed investee companies (HK$75).
