Restore Tencent’s potential performance

In Q2 2021, the first loss of “share of profit/loss of associates” will be 3.86 billion yuan, which will increase to 5.67 billion yuan and 8.27 billion yuan in Q3 and Q4, which will have a greater impact on the company’s performance.

In 2021, Q3 was due to Didi Chuxing, and Q4 due to Didi Chuxing, JD.com, Meituan, Shell, Bilibili, and SEA led to an enlarged “share of profits/losses of affiliated companies”.

Before excluding “share of profits/losses of associates”, Tencent’s Q1-Q4 non-GAAP profit growth in 2021 was 22.3%/12.9%/-1.7%/-26.1%, respectively.

After excluding the impact, Tencent’s Q1-Q4 growth rate in 2021 will be 21%/16.9%/10%/-16%, respectively.

The impact of “share of profits/losses of associates” on non-GAAP profit growth: It pulled down the quarterly growth rate by about 10%.

Tencent is currently at the bottom of the fundamentals

We define the bottom of fundamentals as from “narrowing negative growth rate” to “expanding positive growth rate”, we believe that the company will narrow the negative growth rate from Q1 in 2022, turn positive growth rate in Q3, and expand positive growth rate in Q4 speed up.

Tencent’s Q4 non-GAAP profit growth rate in 2021 will be -25.1%, and the negative growth rate in Q1 will narrow to -18.1% in 2022. Until Q3 in 2022, it will turn negative to positive, and Q4 will start to accelerate.

Reasons that affect profits

Changes in the structure of advertisers reduce revenue. In July 2021, the state introduced the “double reduction” policy, and the education and training industry has shrunk. Under the new regulatory environment, changes in the advertiser’s environment have caused the company’s Q3 online advertising revenue to drop by 338 million yuan and Q4 revenue by 9.77 yuan. billion.

In the short term, the increase in bandwidth costs for watching video numbers will affect performance, and in the medium and long term, it is expected to increase revenue and eliminate costs. We assume that the increase in the company’s bandwidth cost is all derived from the increase in the cost of video accounts, then the cost of video accounts in 21Q1-Q4 increased by 1.094 billion yuan, 900 million yuan, 1.618 billion yuan, and 1.772 billion yuan respectively.

The short-term video account has not been realized, and this part of the cost cannot be converted into income, which affects the performance. In the medium and long term, if the video account is successfully monetized, the impact of the cost of the video account on the company’s performance is expected to be eliminated.

Future performance growth point

• The game has turned around:

The new game “Return to the Empire” is expected to contribute 1 billion turnover to Q2, and we will pay attention to whether the DNF national server is online.

The head games “Honor of Kings” and “Peace Elite” increased by 6.4% and -6.92% year-on-year in Q1 in 2022. Overall, there was a slight increase compared with Q1 in 2021.

On March 29, the new game “Return to the Empire” was launched in the national service, and it is expected to contribute 340 million yuan per month in the second quarter.

The DNF mobile game was launched in South Korea on March 24. The APPstore continued to rank first, and the Google Play best-selling list ranked the top three. We will pay attention to whether the DNF mobile game will be launched in China in the future.

• The re-issue of the game version number is expected to drive the recovery of the advertising business in the second half of the year:

In the second half of 21 and 22, education advertising revenue is less, and the advertising space released by education advertising is expected to be filled by other advertisers in the first half of 22; due to the impact of the epidemic, e-commerce advertising will be under pressure in the short term, and it is expected to be released in June. Recovery; in the second half of 21, due to the lack of new version numbers, the increase in new game purchases is small. In April 22, the game version number will be re-issued. In the second half of the year, it is expected to bring new game purchases to increase, driving the recovery of the advertising business.

Investment Advice

We believe that Tencent is currently at the “bottom of fundamentals”, and the game business has shown signs of reversal in Q1. We will pay attention to the progress of subsequent new game launches; the re-issue of game version numbers is expected to accelerate the recovery of the advertising business in the second half of the year.

Risk warning: new game sales are less than expected, video account monetization speed is less than expected, and the regulatory environment has changed

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