22q1 overall performance: revenue is lower than expected, and operating leverage continues to drag down short-term performance; Focus on the confirmation of the bottom of 22q2 fundamentals and the gradual resonance between the improvement of 22h2 revenue growth and the stabilization and recovery of profit margin
22q1 revenue was basically flat year-on-year, non IFRS operating profit was – 15% year-on-year, and non IFRS net profit was – 23% year-on-year, both lower than Bloomberg’s expectations. 22q1 gross profit was – 9% year-on-year, with a gross profit margin of about 42.1% (compared with 41.7% expected by Bloomberg), with a year-on-year profit of – 4.2pct and a month on month profit of + 2pct. 22q1 operating expenses were + 26% year-on-year, and the expense rate was + 0.6pct month on month, which was higher than Bloomberg’s expectation. 22q1non IFRS operating profit margin was 27%, with a year-on-year ratio of -4.6pct and a month on month ratio of + 4pct, slightly better than Bloomberg’s expectation. As the current non IFRS share accounted for 2.2 billion yuan of joint venture losses (22q1 share accounted for 500 million profit), the net profit margin attributable to the parent company of 22q1 non IFRS was – 5.6pct to 18.9% year-on-year, which was basically consistent with Bloomberg’s expectation. In the short term, although the company’s profit margin fell more year-on-year, it was partly due to the high base factor, and showed a stable recovery month on month. The overall gross profit margin and core operating profit margin of the current period were better than Bloomberg’s expectations, and the performance growth rate was lower than expected, mainly due to the decline of revenue.
Split the year-on-year increment of 22q1 core operating cost (revenue non IFRS operating profit), of which the main items include:
1) after deducting share based remuneration, the cost of cash employees in 22q1 increased by about 4.4 billion yuan year-on-year (the corresponding growth rate was about 26%), and the increase of core cost accounted for nearly 70%, which was consistent with the increase of the number of employees (the number of employees at the end of 21q1 was + 30%, but the cost of single employee decreased slightly year-on-year). Looking forward to the follow-up, the number of employees in 22q1 increased by 3442 month on month, and the marginal slowdown was obvious (13166 / 5423 month on month growth in 21q3 / 21q4). Starting from 2022h2, with the obvious increase of the base and the year-on-year decrease of the cost of superimposed single employee, it is expected that the pressure on salary expenditure is expected to be relieved.
2) the bandwidth and server cost of 22q1 increased by 1.3 billion yuan year-on-year, accounting for about 20% of the increment of operating cost. The year-on-year growth rate in a single quarter was 20%, and the cost growth rate was higher than the revenue growth rate, but showed a natural downward trend with the base. Looking forward to the follow-up, we expect that the bandwidth and server cost of the video number will still increase naturally with the traffic, but the scale of cost increment is relatively limited.
3) 22q1 content cost (including amortization of intangible assets) increased by 1.3 billion year-on-year (with a corresponding growth rate of about 6%), which is speculated to be mainly due to the increase of game content cost, long video and video number related content cost of Winter Olympics. After the Winter Olympics, we expect that the content cost of 22q2 may be directly improved. In addition, the company said it would take measures to further control the cost of Tencent video in the coming months.
4) 22q1 transaction costs (bank fees, channel and distribution costs) were – 2% year-on-year, similar to the overall revenue growth. 22q1 promotion and advertising expenses decreased by 1.1 billion yuan year-on-year (corresponding growth rate of about – 18%), a month on month decrease of 3.8 billion yuan, and the effect of marketing cost control was reflected relatively quickly.
Since 2021, under macro and regulatory factors, the growth rate of the company’s revenue and core profit has decreased quarter by quarter. We believe that 22q1 is close to the bottom of the fundamentals, and focus on the release of advertising business pressure and the change of the number of employees in 2022q2 to confirm the bottom. Entering 2022h2, with the decline of macro adverse factors, the slowdown of employee cost growth and the adjustment of base, it is expected that the income growth rate will improve or gradually resonate with the stabilization and recovery of profit margin, driving the gradual repair of performance elasticity.
Game business: the growth rate of revenue may be at the low point of the whole year. In 2022, China’s game supply will improve slightly and the large amount of overseas game supply is worth looking forward to; Short term exchange rate changes may be conducive to the recognition of overseas income
22q1 total game revenue (including social networks) turned negative to – 2% year-on-year, lower than Bloomberg’s expectation; Current liabilities – deferred income balance + 9.1 billion yuan on a seasonal basis; The gross profit margin of value-added services was 50.4%, with a year-on-year ratio of -4.7pct and a month on month ratio of + 1.7pct, slightly lower than Bloomberg’s expectation.
22q1 local game revenue was – 1% year-on-year (21q3 / 21q4 + 5% / + 1% respectively) and + 11% month on month. New anti addiction regulations continued to drag down the year-on-year growth. The commercialization of “glory of the king” during the Spring Festival was weaker than that in the same period last year, and the year-on-year growth resumed in March. The increment of new games such as “hero League hand tour” and “golden shovel battle” was offset by the decline of “Tianya Mingyue knife Tour” and “call of duty hand tour”. 22q1 overseas game revenue + 4% year-on-year (21q3 / 21q4 + 20% / + 34% year-on-year respectively), and + 8% year-on-year at fixed exchange rate. “Pubgm” went down with the normalization of the market after the epidemic, partially offsetting the increment of “valorant” and “tribal conflict”. In addition, the adjustment of relative revenue recognition caliber of fist companies in this quarter also has a slight drag on growth.
Looking forward to the follow-up, we expect that the growth rate of total game revenue in 22q1 may be the low point of the year, and it is expected to achieve an increase of 5% + in the whole year:
1) the Chinese version number was newly issued in April, releasing a positive signal. If the subsequent resumption of normal issuance, the company’s new supply elasticity of China Mobile Games will be improved. During the year, we may pay attention to whether reserve games such as self-developed “dawn awakening” and acting “new dragon eight” can contribute new increment.
2) in the first three quarters of 2022, the battle of the golden shovel and the mobile tour of the League of heroes can still contribute considerable year-on-year increment. The new “return to Empire” launched in March 2022 performed well.
3) we observed that the margin of China’s head games continued to improve, the commercialization of “glory of the king” continued to increase in April, and the diameter of sensortower was the same as that of IOS in April, with a year-on-year increase; The IOS of peace elite improved month on month in April, and the year-on-year decline narrowed.
4) we expect that the company will have sufficient overseas game pipelines in 2022, and the growth of supply will drive the growth of overseas water. Since April, the increase in the exchange rate of USD against CNY may also be conducive to the recognition of short-term overseas game revenue. The Korean clothes of “DNF mobile game” launched in March are beautiful, and the potential volume of “apex mobile game” launched in May is considerable. Subsequent self-development, agent distribution and subsidiary supercell still reserve a number of new games or are expected to be launched in 2022.
Online advertising: the short-term pressure may be concentrated in 22q2, and the medium-term focus on video number information flow advertising provides new momentum
Advertising revenue in 22q1 was – 15% year-on-year (21q4 was – 13% year-on-year) and – 16% month on month. The expansion of short-term pressure is mainly caused by the superposition of macroeconomic adverse factors, vertical industry supervision and the self-regulation of the online advertising industry. The year-on-year drag factors mainly come from the weak advertising demand in education, games, online services and other industries. 22q1 media advertising – 30% year-on-year (21q4 – 25%) and – 27% month on month. Tencent’s video advertising revenue decreased by double digits year-on-year. 22q1 social and other advertising – 15% year-on-year (21q4 – 10% year-on-year) and – 15% month on month. Circle of friends advertising fell slightly year-on-year, and the fast selling and game industries were relatively good, but the demand of education and real estate industries was unfavorable. Official account advertising increased year-on-year, but the sustainability of the annual dimension is questionable. The advertising revenue of mobile alliance has decreased significantly, and the traffic and efficiency are relatively significantly affected by regulation.
Looking forward to the follow-up, the company said that since 2022q2, the advertising market has remained depressed, and advertisers in industries such as fast sales, e-commerce and tourism have significantly reduced advertising spending.
We expect that in 2022q2, the impact of macroeconomic and local epidemics will be concentrated. Meanwhile, the year-on-year drag factors of games, education and other industries may still exist, and the year-on-year decline of advertising revenue will further expand. According to appgrowing data, Tencent’s advertising platform accounted for about 13.9%, 6.8%, 6.2%, 6% and 5.9% of the game industry, real estate, education, skin care and beauty, and comprehensive e-commerce in 2021. After entering 2022h2, with the improvement of the macro environment and the adjustment of the base, the decline is expected to gradually narrow and return to the normalized level. The broadcast volume and duration of 22q1 video Number continue to increase significantly year-on-year. Hot operations such as winter Olympics and online concerts continue to deepen users’ cognition. Even if it is statically calculated, its commercialization space is considerable. We believe that after the launch of video streaming advertising, it will become the main source of medium-term growth of advertising business.
The gross profit margin of 22q1 advertising business was – 8.4pct year-on-year and – 6pct month on month, continuing the downward trend, lower than Bloomberg’s expectation. We speculate that it mainly comes from: 1) the cost of relevant contents of the Winter Olympic Games; 2) The short-term income decreases, and the bandwidth and server cost are relatively rigid; 3) The growth of video traffic and the short-term dislocation of large-scale commercialization. We believe that the content cost of advertising business will be improved after the Winter Olympic Games, and the improvement of revenue side needs to be observed for the reversal of items 2 and 3. 22q2-22q3 advertising gross profit margin base is high, and the year-on-year decline may still be obvious. In the medium term, after the video number information stream advertising with relatively high gross profit margin is launched, with the increase of the proportion, it will help Tencent improve its overall advertising gross profit margin.
Fintech and corporate services: revenue growth slowed and profitability improved; The cloud business is in the transition period of strategic adjustment. In the medium and short term, we pay attention to the increase of PAAS proportion, driving the improvement of profitability. In the long term, we expect the commercial value of SaaS to appear
22q1 financial technology and enterprise service revenue increased by + 10% year-on-year to 42.8 billion yuan (Mom – 11%), lower than Bloomberg’s expectation. The segment gross profit margin was 31.6%, with a slight year-on-year decrease and a significant month on month improvement, which was better than Bloomberg’s expectation. On the whole, the growth of 22q1 financial technology and enterprise service revenue slowed down, including the short-term impact of the epidemic (mainly for commercial payments), as well as the structural adjustment factors of cloud business. At the same time, it was also affected by the high base. 22q1 gross profit of financial technology and enterprise services remained + 4% month on month.
22q1 financial technology revenue growth slowed down, presumably due to the impact of local epidemic and higher base on commercial payments. Since mid March, the performance of commercial payment has been sluggish, especially in the fields of transportation, catering and clothing. The payment of e-commerce industry has also been affected by the epidemic.
22q1 enterprise service revenue decreased slightly year-on-year, mainly due to the active adjustment of strategy. The company’s 2021 financial report clearly pointed out that “the focus of development of IAAs and PAAS should be redefined, from the simple pursuit of revenue growth to the goal of creating value for customers and achieving high-quality growth.”
22q1 company has actively reduced the projects with high proportion of “aggregate subcontracting / hardware tying” and CDN projects with high discounts, and invested more resources in PAAS solutions in the field of self-developed video cloud and network security with higher gross profit margin. According to 36 krypton report, Tencent CSIG will position “profit” as the business development goal in 2022. Only self-developed products can be included in the business revenue KPI in the sales model assessment.
In terms of SaaS, the company currently gives priority to expanding business scale rather than pursuing significant revenue growth. However, the successful experience of SaaS commercialization of overseas core enterprises and the significant scale and rapid growth of PAAS expenditure in China confirm the commercialization potential in the future. We expect that in the medium and long term, the company’s high user value in SaaS product matrix will eventually be reflected in high commercial value. In January this year, Tencent conference, enterprise wechat and Tencent document announced that the integration of the three products was opened, and the integration of Internet efficiency tools in the industry was officially realized.
Investment suggestions:
At present, Tencent’s revenue growth from 2022 to 2023 is predicted by Bloomberg to be + 7% / + 14.5% respectively, and the growth of non IFRS net profit is predicted to be – 1% / + 22% respectively. From 2022q2 to 2022q3, Bloomberg forecasts revenue growth of + 1% / + 7% and non IFRS net profit growth of – 15% / – 2% respectively.
In the short term, the trend of advertising and tob business shows that the market performance expectation in 2022 may still be adjusted, and the uncertainty needs to wait for the macro environment to be further clarified. It is suggested to pay attention to the improvement of potential performance elasticity under the low base of 22h2, the release of overseas game pipeline and the commercialization rhythm of video number.
In the medium and long term, we expect the fundamentals of the company to recover rapidly and the growth is still supported. We believe that Tencent has a solid foundation in games, advertising and financial technology business. After the elimination of macro adverse factors and the weakening of the marginal impact of regulation, Tencent can resume normal growth. We believe that under the trend of digitization, the cloud business has the potential to restore growth after strategic adjustment.
At present, Tencent’s PE is expected to be 24x / 19x from 2022 to 2023, and the 12-month prospective PE is lower than the 5-year average discount of 26%. Compared with overseas technology giants, due to the valuation adjustment of US stocks, the long-term relative valuation difference has narrowed. We believe that the pressure on the company’s short-term performance in one to two quarters is mainly due to the centralized release of macro adverse factors and regulatory impact, and its own cost control strategy is slightly slower than the change of industry cycle. We suggest that there is no need to over amplify the concerns about the company’s short-term performance, and the medium-term growth elasticity is still supported. Tencent has relatively stable barriers in the social and content fields, and the existing commercialization path is mature. It is expected to return to the original growth path after short-term adjustment. At the same time, game going to sea, video Number commercialization and PAAS + SaaS can provide sufficient space for medium-term development. Continue to pay attention to the confirmation of the bottom of 22q2 fundamentals, the optimization of employee costs and the promotion of new commercialization opportunities. It is suggested to pay attention to Tencent holdings.
Risk tip: the supply of new games in China is affected by the issuance of version numbers; Advertising business faces certain growth pressure in the short term; There may be some regulatory pressure on financial performance business; Cost optimization is less than expected.
