May 14, 2025 Tencent's performance report is out, the preferred choice of stable tech giants?

$TENCENT(00700.HK)$ The performance has been released. From the surface numbers, the company's first-quarter revenue reached 180.022 billion yuan (RMB, the same below), an increase of 13%. Adjusted net profit was 61.329 billion, a year-on-year increase of 22%, both figures exceeding market expectations. However, the net profit of 47.821 billion yuan, with a year-on-year growth of 14%, and earnings per share of 5.252 yuan, a year-on-year increase of 17%, fell short of market expectations. The market usually focuses more on non-International Financial Reporting Standards profits, as this data better reflects the company's sustained profitability. The profit gap between the two may have been caused by one-time capital expenditures invested in AI-related businesses.

In the past year, we have made investment judgments by reviewing Tencent's performance details each time. This time, we would like to specifically revisit the views from the last performance article and the market performance over the past month and a half. The details can be reviewed in the article "Tencent's performance is full of surprises; will AI be this year's growth catalyst? 」

From the results perspective, the previous judgment on Tencent's performance would be considered incorrect, as the stock price fell from 540 yuan to a low of 419 yuan, and as of today's closing at 521 yuan, the stock price is still down 3.5% during this period. However, $Hang Seng Index(800000.HK)$ At the same time, it fell from 24,771 points to today's closing price of 23,640 points, a decrease of 4.6% during this period; $Hang Seng TECH Index(800700.HK)$ It has dropped over 10.9%. To some extent, Tencent's performance since the last earnings report has been "outperforming the market".

For novice investors, one point to emphasize is that analyzing performance mainly involves judging the company's profit outlook and whether it holds investment value, but market risks are still unavoidable. For example, during this period, the market faced trade wars, AI Chip sanctions, risks of delisting for Chinese stocks, etc. These risks can affect stock price trends but will not be reflected in the earnings.

In summary, analyzing performance mainly determines the medium to long-term investment value of Stocks, and after the release of this performance report, there are grounds to maintain the optimistic viewpoint from the previous quarter. Now let's take a look at the latest numbers for this quarter.

Gross margin & Capital expenditure

Over the past year, the market has been extremely focused on Tencent's gross margin and capital expenditure. Tencent has efficient cost control capabilities, leading to continuous improvement in overall gross margin. However, with the high base effect and investments in AI, gross margin is starting to face pressure in the second half of 2024. In the latest first quarter of 2025, the company's gross margin reached a new high of 55.8%, primarily benefiting from the growth contribution of high gross margin revenue sources (such as Gaming and advertising), as well as improved cost efficiency in payment services and Cloud Computing Service. This figure directly reflects the company's cost control abilities, and the latest quarterly performance indicates that this capability remains very reliable.

Since investments in AI began to increase in the second half of 2024, the capital expenditure pressures across various industries have also started to rise, and Tencent is no exception. Although the company's capital expenditure this quarter has fallen seasonally, it is still at a peak level, primarily due to the significant demand for IT infrastructure and Datacenter in the domestic AI industry. The author’s views on capital expenditure are not much different from those of American companies; high capital expenditure is not an issue as long as the company's overall execution capability and AI ROI remain optimistic. Simply put, as long as it is not blindly spending money, it is not a problem.

More importantly, the company's net cash this season is RMB 90.2 billion, an increase of 17% compared to the previous quarter, mainly benefiting from the seasonal increase in the total transaction volume of its core business in Gaming. The company has a stable free cash flow, laying a solid foundation for the long-term development of AI. This is the core reason why the author has always been relatively optimistic about Tencent.

Gaming Business

Following the same logic as the previous quarter, the local market's gaming revenue grew by 24% year-on-year to RMB 42.9 billion, mainly contributed by well-known core games such as 'Honor of Kings' and 'Peacekeeper Elite', as well as revenue contributions from 'Dungeon and Fighter: Origin' and 'Delta Force' released last year. Considering the currently harsh competition environment in mobile gaming, the company's core IPs maintaining stable growth is a crucial element for the company's leadership position in the industry.

International market gaming revenue was RMB 16.6 billion, a year-on-year increase of 23%. Recently, the overseas market has been a major growth area for many Chinese enterprises, and Tencent is no exception. I believe there is nothing more to add in this regard.

Overall, Tencent's Gaming business maintains stable growth momentum both domestically and internationally, providing steady growth to the company's cash flow. This will significantly help the company in the development of other new businesses. This is an important element leading to the increase in valuation.

Marketing Services (i.e., advertising business)

Revenue from the Marketing Services business grew 20% year-on-year to 31.9 billion yuan in the first quarter of this year. The growth is due to similar reasons as in the past year, benefiting from strong demand from advertisers for video accounts, mini-programs, and WeChat search advertising inventory. In simple terms, even in the currently competitive economic environment (such as well-known sectors like Autos, milk tea, and Gaming), the overall demand for advertising remains assured despite weak macroeconomic performance.

The continuous AI upgrades of the advertising platform and the optimization of the WeChat trading ecosystem have also led to further improvements in the business's gross margin. Revenue and gross margin declined quarter-on-quarter, mainly affected by the seasonal downturn of advertising activities during the Spring Festival, but both managed to maintain considerable growth performance year-on-year.

Marketing Services is currently Tencent's second largest core business, but compared to 2023, the high base effect from this business has led to a slowdown in growth. However, with the increase in efficiency from AI applications this year, the outlook remains promising. Like the Gaming business, it is believed that it can maintain stable growth and profit performance.

Fintech and Business Services Revenue

From 2024 onwards, the performance of Fintech revenue is no longer the market's focus, mainly due to the business being dragged down by weak macroeconomic conditions. Revenue from Fintech and Business Services grew 5% year-on-year to 54.9 billion yuan, with no improvement in the consumption market and limited room for improvement in the consumer Crediting business. Thus, this business is currently facing larger issues related to the macroeconomy.

While there is little breakthrough in revenue, gross margin has continued to improve over the past two years, increasing from 46% in the same period last year to 50%. The main reasons are the improved cost efficiency of payment services and Cloud Computing Service, as well as increased revenue contributions from consumer loan services and wealth management services.

As with the views from the past year, as long as the market sentiment improves and the outlook for the economy becomes optimistic, Tencent's financial technology business is expected to benefit simultaneously. This is also one of the reasons why Tencent's stock price performance has been in sync with the market's ups and downs over the past two years.

A brief summary

The author has always been bullish on Tencent's investment prospects, and this performance did not change that perspective. Considering the company's current valuation level, the TTM price-to-earnings ratio is only 22 times, and the medium to long-term investment value remains very attractive. The target price and views can still refer to last season's article.

In terms of risks, the only uncertainty that exists is that the detailed impact of Tencent's Yuanbao investment was not mentioned in the earnings report, and the market is currently more concerned about whether there will be pressure on cash flow. Considering the overall cash flow performance of the company is still strong, it is believed that this should help mitigate related concerns. It may be necessary to pay close attention to the management's guidance during the earnings call.

Technically, the stock price has significantly risen along with the market, maintaining a good upward trend. The 10-day and 50-day moving averages recently issued a golden cross signal. The short-term resistance level has moved up to the previous high of around 547 yuan, while the reference support levels are the 10-day and 50-day lines, approximately 496 yuan and 492.6 yuan.

Finally, pay more attention to the new PC version of Futubull, where you can make some determinations from options -> earnings analysis.

What is more practical and recommended is to pay attention to the predicted volatility on earnings day. The anticipated volatility for this earnings is only 2.94%, and price movement must exceed this range to reflect the earnings in a significant way. Otherwise, it will be like the example on March 19th last season when the stock price fell 3.8%. Although the stock price underwent a deep adjustment afterward, it was actually just due to market risks. Simply put, facing market risks is not the same as facing individual stock risks.

This earnings forecast volatility will effectively assist everyone in determining the reliability of the post-earnings rise and fall for the mid-term market and the deployment of options strategies.

Futu Securities Chief Analyst Tan Zhile

(Source: Hong Kong Stock Exchange Tencent Performance Announcement)

(The author is a licensed person from the Securities and Futures Commission, and neither the author nor their related parties have any financial interests in the suggested issuers.)