Over the past three years, tencent music's stock price has experienced highs of over 700 Hong Kong dollars, dropped to below 200 Hong Kong dollars at its darkest moment, and also embarked on a significant rebound from the bottom.

The ups and downs of tencent music's stock price are closely related to both the overall market environment and its performance. Tencent will release its latest earnings on November 13th. Each earnings release may signify a good trading or investment opportunity. Before that, investors need to understand how to interpret its earnings.

So, how should we look at tencent music's earnings? We can focus on 4 key points: user base, revenue growth, changes in profitability, and major shareholder shareholding and company buybacks.

1. User Base

Tencent relies on its user base, which initially started with QQ and gradually transitioned to WeChat after 2011. The reason it is called a user base is that Tencent's main sources of revenue, including gaming, advertising, and financial service revenue from WeChat Pay, largely monetize the huge user traffic from WeChat and QQ.

Therefore, observing changes in tencent music's user base is crucial. Tencent discloses the monthly active users of WeChat and QQ in every quarterly report. Among them, QQ has been gradually replaced after the introduction of WeChat, and its monthly active users are still slowly declining. What we need to pay more attention to is the expanding influence of WeChat.

Since the launch of WeChat, its monthly active users have been growing every quarter, although the growth in a single quarter may not be significant, the trend is very stable.

Today, WeChat has reached 1.371 billion users, with limited room for further growth. In future earnings reports, all we need to observe is whether the number of users can remain stable. As long as there is no continuous decline over several quarters, it may indicate that tencent music's user base remains solid.

2. Revenue growth.

Tencent was also a company with revenue growth exceeding 20% a few years ago, but with the impact of the economic environment, Tencent's revenue growth rate began to decline in 2021 and experienced negative growth in several quarters of 2022.

In recent quarters, with the improvement in economic expectations, coupled with the lower base in the past, and the growth in Tencent Video Number's revenue, Tencent's revenue growth rate has started to rebound, once again reaching double-digit growth, with a year-on-year growth rate of 8% in the latest 2024Q2 quarter, maintaining a high single-digit growth rate.

For Tencent's future growth expectations, we can analyze them by breaking down its various business sectors. Tencent's revenue sources mainly include three areas: value-added services, online advertising, fintech, and enterprise services.

The first area, value-added services, is also Tencent's largest source of revenue, accounting for more than half of the overall revenue. It mainly includes revenue from the dominant online gaming business sector, as well as social network revenue including Tencent Music, Tencent Video, and video number live services. Among them, social network revenue has returned to growth driven by income from WeChat video live services and others, with the market focusing more on the previously declining online gaming revenue.

Since the first quarter of 2022, Tencent's online gaming revenue has mostly declined year-on-year in most quarters. However, with the continued popularity of Tencent's blockbuster IP mobile game - DNF Mobile launched in May 2024, it has also driven the rebound of Tencent's gaming revenue. Tencent's gaming revenue basically stopped declining in 2024Q1 and returned to growth in 2024Q2, with a year-on-year growth rate of approximately 9%.

For the growth expectations of Tencent's gaming sector, we can observe a key indicator, which is deferred revenue, meaning money that has been recognized but not yet provided as a service, to be confirmed as revenue in future quarters. Tencent's deferred revenue is mainly from the online gaming business, including deferred payments from Tencent Music, Tencent Video, and others. In the 2024Q2 quarter, Tencent's deferred revenue was approximately 1.07 billion, a year-on-year increase of 14.6%, once again reaching a recent high, which may be a good signal for gaming revenue and overall revenue growth.

The second area, fintech and enterprise services, is Tencent's second largest revenue source, mainly including financial technology revenue related to WeChat Pay, and enterprise service revenue such as Tencent Cloud and video number technical service fees, acting as the cornerstone of Tencent's revenue growth. In the 2024Q2 quarter, the revenue from this sector only grew by 3.7% year-on-year, with growth slipping to the low single digits.

The main reason for the slowdown in growth is that the growth of revenue related to WeChat Pay has slowed down. This is because the penetration rate of WeChat Pay has reached a bottleneck, while the overall economic consumption downturn has led to a slowdown in offline payments. Fortunately, driven by cloud computing service revenue and video number business service revenue, Tencent's corporate service revenue is still maintaining double-digit growth.

The third block, internet advertising, is Tencent's third-largest revenue source, accounting for only about 14% of revenue. However, in recent quarters, the revenue growth rate has been the fastest among the three main businesses. It has even exceeded 20% for four consecutive quarters, with a year-on-year growth of approximately 19.5% in 2024Q2. The reason for Tencent's internet advertising business returning to a fast growth track may be mainly due to the promotion of video numbers.

On one hand, the penetration and user stickiness of video numbers are still expanding. After doubling the user time in 2023, in 2024Q1-Q2, the user time continues to show a significant growth trend. On the other hand, the monetization of video numbers is progressing smoothly, increasing exposure to information flow ads, and accelerating the progress of e-commerce business, leading to an increase in merchant ad placements.

For the future revenue growth in the coming quarters, we can focus on observing whether the online gaming business can continue its rebound trend, if financial technology and corporate services can maintain stable growth, and whether internet advertising business can continue its high growth momentum.

3. Changes in profitability

Against the backdrop of Tencent's overall revenue growth slowdown, Tencent has shifted its focus on performance improvement to the improvement of profitability, known as "reducing costs and increasing efficiency." This is also a common practice for many listed companies. Over the past two years, Tencent has implemented several rounds of layoffs essentially to enhance the company's profit potential.

At the beginning of 2020, Tencent's profitability was at a relatively high level, with a gross margin close to 50% and an adjusted net profit margin maintained at around 25%. However, in the following two years, Tencent's profitability gradually declined.

In the fourth quarter of 2021, Tencent's gross margin dropped to 40.1%, and the adjusted net profit margin plummeted to 17.3%. With the decline in profitability driving Tencent's net profit growth rate to drop drastically. Similarly, in the fourth quarter of 2021, Tencent's revenue was 135.4 billion, barely maintaining growth, but the adjusted net profit was only 25.5 billion, a significant decrease of 25.1% year-on-year.

Against this background, Tencent announced the 2021 annual report and fourth quarter report, and announced the initiation of cost reduction and efficiency improvement, including cutting inefficient or loss-making businesses, streamlining personnel, and the effects are also obvious.

The improvement of a company's profitability mainly includes two aspects, one is the improvement of gross margin, and the other is the control of expense ratio.

In terms of gross margin, with various costs reduction, coupled with the rise of new high-margin businesses such as video advertising, Tencent's gross margin has been continuously increasing since 2022Q1, from the low of 40.1% in 2021Q4 to 53.3% in 2024Q2, an increase of 13.2 percentage points, reaching a historical high.

As for the expense ratio, Tencent's sales expense ratio decreased from 8.1% in 2021Q4 to 4.7% in 2024Q1, including R&D and administrative expense ratios, the administrative expense ratio decreased from 16.9% to 15.6% during the same period, the overall expense ratio decreased from 25.0% to 20.3%, a reduction of nearly 5 percentage points. However, in 2024Q2, Tencent's expense ratio level rose slightly.

With the continuous increase in gross margin and the decrease in overall expense ratio, Tencent's adjusted net profit margin has soared, from 17.3% to 35.6% in 2024Q2, more than doubling, a remarkable transformation.

Driven by a significant increase in profitability, although Tencent's revenue growth rate still remains flat, its net profit growth rate has significantly accelerated for 10 consecutive quarters, from -25.1% in 2021Q4 to 55% in 2024Q2, far exceeding revenue growth.

In the subsequent performance, we can observe whether Tencent's profitability still has room for further improvement, and drive the continuous growth of net profit level.

4. Major shareholders reducing holdings and company repurchases

The decline in Tencent's stock price from 2021 to 2023 was not only due to the company's declining performance and poor market conditions, but also a very important reason was the continuous shareholding reduction by major shareholders. Starting from June 2022, Tencent's major shareholder Prosus broke its commitment to continue reducing its holdings of Tencent stocks in order to free up cash to support its buyback plan.

Since then, Prosus has been reducing millions of shares every month, with amounts reaching hundreds of billions of Hong Kong dollars, and its shareholding percentage has decreased from the previous 28.4% to 24.4%. During this period, although Tencent also initiated some buybacks to offset the selling pressure on the stock price caused by the major shareholder's reduction, the overall buyback quantity was significantly lower than the reduction quantity.

However, this situation has been alleviated since this year. On one hand, Tencent has increased its buyback starting from the end of 2023, and announced a buyback plan of 100 billion in the 2023 annual report, doubling the buyback amount from 2023; on the other hand, major shareholder Prosus has eased the pace of reduction in the past few months, overall falling below Tencent's buyback intensity.

In the future, we can continue to observe the implementation of Tencent's buyback plan, as well as the pace of share reduction by major shareholder Prosus. If Tencent's overall buyback amount can be greater than Prosus's reduction amount, it may bring some bullish impact on its stock price.

Seeing this, you may have some new insights on how to interpret Tencent's performance. It is worth mentioning that every time a star company releases its earnings, it may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

Finally, to summarize,

When it comes to tencent's earnings, we mainly focus on four aspects: user base, revenue growth, changes in profitability, and shareholder reductions and company buybacks.

As for tencent's user base, our main concern is whether its WeChat users can maintain a stable trend.

In terms of tencent's revenue growth, we can pay attention to whether its gaming business can continue the rebound trend, if its fintech and enterprise services can maintain steady growth, and if its online advertising business can sustain high growth momentum.

Regarding tencent's changes in profitability, we can observe whether there is further room for improvement in its profitability, and whether it can continue to drive net profit levels to further growth.

When it comes to tencent's shareholder reductions and company buyback situation, we can observe the comparison between the buyback amount and the shareholder reduction amount.