Tencent Holdings Ltd (0700)

[Choon]

My takeaways from 2023Q4 results:

Overall, in my view, it is a good set of results where business and earnings continue to exhibit growth. Tencent also showed a positive and generous stance of returning capital to shareholders. In terms of share price reaction, the market is however not too impressed.

(Earnings Performance)
1. Profit grew strongly in 2023Q4 and FY2023 as revenue grew on platforms which costs are already paid for.
2. Margin expansion would support earnings growth in FY2024.
3. Projecting 2023Q4 gross margins over FY2024, even with no revenue growth, profit in FY2024 will be higher yoy.

(Return to SHs)
4. 42% increase in dividend per share for FY2023.
5. Commitment to double the amount of share repurchase in FY2024 to HKD100B.
6. For reference, average daily trading value is about HKD6B (HKD 300 x 20M shares). HKD100B is equivalent to ~1 month of trading value.

(Advertising)
7. Weixin Search is adding a new dimension to Tencent’s ecosystem and could further strengthen Tencent’s advertising business.
8. Near-term financial benefits of AI is going to be felt most in growth in advertising revenue.

(Games)
9. Domestic Games revenue was down 3% yoy in 2023Q4. International Games revenue was down 1% yoy (constant currency terms) in 2023Q4.
10. Tencent believes that gaming revenue will improve from 2024Q2.
11. Tencent games are at the low end of industry ARPU, thus not too worried about regulations on gaming spend.

(FinTech)
12. Lets not forget that Tencent has a thriving financial services business operating on a take-rate model.
13. Increased revenue contribution from FinTech Services driven by increased commercial payment volume, wealth management fees and consumer loan fees. Tencent enhanced Mini Program based, QR code and palm payment solutions, driving repeat sales for offline merchants.
14. Tenpay’s capital increase – a silent approval for further development of business.

[ksir]

I am not a gamer or avid user of WeChat's ecosystem so I find your thoughts and user experience interesting. Thanks for sharing.

Tencent is monetising live streaming e-commerce on Video Accounts even though they have chose not to monetise e-commerce on Mini Programs. This confuses me. But they must have well-considered this dichotomy.

Do you have any thoughts on their Cloud business? I am skeptical of both Ali and Tencent's strategy of being a B2B cloud provider, why would this business fit with their core B2C business? I became less skeptical of Tencent after reading Pony's dressing down speech to the company, where he directed that Tencent cloud should avoid being an aggregator and focus (seems to be a very narrow focus) on Tencent's existing strengths/products: enterprise productivity apps and mini programs.

Video Accounts monetisation is easier as Douyin/TikTok has done that successfully.
VA is still quite far behind Douyin in scale, technical etc.
Imo, short video monetisation is also easier due to its addictive (or you can call it stickiness) effects.
As in, easier to earn $ from alchohol, cigar than most other products.

Imho, even games have more positive values than short videos, but alas, short video is darn addictive (brainless + addictive, who can resist).

Short video also easier to embed ads and somehow it's auto-played right? so the click through is high.

Not sure if I interpreted you correctly, but cloud is naturally B2B.
Earning $ in Cloud biz can only be B2B, as in how many people will pay for cloud services?
That said, I'm quite happy with the downscaling of cloud biz players in China.
Tencent is now focusing more on their strength, eg: in video streaming, messaging etc, from what I know quite a lot of video streaming products are using Tencent PaaS or SaaS.

Previously the players are in war of grabbing the general Infrastucture (IaaS) market (big but commodity)
but now, they are focusing more on Platform (PaaS) & Services (SaaS).

IaaS is imo, low margin and hence need huge scale, AWS is the leader here, how you fight with the Walmart of the cloud?
So far, the best way is to learn from Microsoft example.
Microsoft leverages on their Office365 suite (SaaS) and soon CoPilot will be another magic bullet, to grab the market share from AWS. I mean why you still use AWS if most of products you use are in Microsoft cloud, bcos it'd be more seamless.

So the current development of cloud players trying to differentiate their offerings is great and it should create different giants with their own strength, for instance could be:
Video streaming, messaging, games go to Tencent.
AI, auto-driving go to Baidu.
eCommerce go to Baba.
Supply chain go to JD.
etc etc.

Continuing from the above, as the 2024-Q1 webcast provides some answers or "my own confirmation bias" to my points.

2024-Q1 Webcast & transcript (kudos to fool.com guys):
https://webcast.tencent.com/w95tq5
https://www.fool.com/earnings/call-trans...ranscript/

My notes:
1) Pony: International & domestic clients from media, entertainment, and live streaming industries increasingly use Tencent Cloud media services' integrated audio and video cloud solution.
>> Their focus on the cloud media services strength to differentiate with others.

2) On Buyback? 
Martin: don't think our buyback is share-price dependent. Given the fact that our profit has increased quite substantially, the value of our investment portfolio has been increasing, and also our long-term prospect is actually very good. So, that's why we'll continue to pursue our share buyback at this point in time.

3) On high-quality growth strategy whether is sustainable? 
Martin: the fact we can now unleash a lot of these growth drivers is not because we are milking/harvesting our platform. It's because we have always been investing in our platform & this is a continuous action. The reason the high-quality growth driver has become clearer is because we've actually pruned the lower-quality products & services & the distractions, so we can focus on our core platforms & make the growth drivers more obvious and apparent. And we do believe these growth drivers, be it video accounts advertising or Weixin Search advertising or value-added services on top of our payment platform and, over time, the e-commerce service fees, these -- sort of a pretty long runway going forward. And we have always also been investing in new areas that can serve as growth drivers for the future, including AI, new games, Weixin e-commerce, and SaaS products, just to name a few. So, we felt, over time, our gross margin should actually continue to benefit from the continued increase of these high-quality revenues.

4) Gross Receipt is leading indicator for Game revenue? 
James: yes, the deferred revenue growth is a positive leading indicator for game revenue growth.

5) App Store revenue sharing arrangement impact? 
James: we do believe App Stores are currently over-earning at the expense of app providers, including ourselves, both in China and even more so internationally. But for the purposes of our business plan, we assume that those revenue-sharing arrangements remain as they are today.

6) Weixin Search, monetization momentum picked up? 
Martin: Weixin Search usage & volume growing on very healthy rate. In fact, it just last year that we started monetizing Weixin Search (on a relatively light basis). So, with the combination of very large engagement with Weixin and Weixin Search itself is actually growing in volume there is an expanding content ecosystem within Weixin, be it official accounts, be it mini programs, be it video accounts, and we're relatively early in the monetization cycle, all these factors will contribute to a pretty long runway in terms of our continued growth of the search revenue on Weixin.

7) Moment vs Video Accounts monetization? 
James: over time monetization for short video feed converges with /overtakes the monetization of the traditional social feed.

[Choon]

KSIR,

Thanks for sharing.

1Q24 results were definitely encouraging. But I didn't get much insights from the 1Q24 results call. For the subsequent quarters this year, I expect yoy improvements to be of a smaller magnitude as there is less cost efficiencies to be extracted. The strong growth in gross profit in 1Q24 was due to  both an increase in revenue and a reduction in COPS.

Focusing more on the long-term, I think I asked you before what is the room for growth for Tencent given that it is already so large and your reply was that you see Tencent as a rich fertile ground. 

It strikes me now that the potential for Video Accounts to win users, advertising revenue and GMV from Douyin presents much room for revenue growth for Tencent; it would however be an uphill and perhaps formidable task given Douyin’s scale and stickiness. The 80% yoy increase in time spent on Video Accounts in 1Q24 is therefore an encouraging metric. Do you think Video Accounts will continue to win market share from Douyin?

On the other hand, there is also the risk that Douyin will evolve into a significant communication platform and challenge Weixin’s dominance. Herein lies the risk of investing in tech stocks; a seemingly dominant business can be weakened overnight.

I cut loss on Ali and transferred all my capital in Ali into Tencent in Dec23. Hopefully it will turn out to be a good move.

[ksir]

IIRC, I think it's Xunzi who said 登高望远.
Which I concur and in my Investment, I no longer look into too nitty gritty or the need to weigh a "investment" in order to know it's fat or not.
In a glance, it should be obvious it's fat otherwise would not be too interesting an opportunity to look upon.

Seems like totally not related and own-self talk own-self "shuang" hahaha.

It's just to say, look back to my investment logic on Tencent:
Is Weixin still a fertile ground? Is the ecosystem still running well? << Yes
Are its Products & Services still providing good values to its Users? << Yes
Are the Products & Services still expanding? << Yes

Looking at particular product/service such as Video Account is like focusing on a Big Tree and missing the fertile ground.
It might be one of the big potential growth now and in future, but it shouldn't be the only one and I do hope it's NOT the future. Imho, I don't think this product has much values to society in large.

So drilling into 1 product it's akin of looking into a game such as the party game and think hey they are losing to NetEase still. At any time, any of their products sure have risk of losing to others.
Don't get me wrong also, I do think their VA is still far behind Douyin or behind Kuaishuo also, but so what, if they need to rely on VA to grow, I would not have invested in them.

I wouldn't be surprised if one day another super good App can replace Weixin, but in my investment logic, it wouldn't be soon or in my foreseeable future or at least the odds of that is super low.

To me, there're several positive reinforcements from the 2024-Q1 webcast.
The main one is it reinforces my understanding of the power of ecosystem or the fertile ground.

[Choon]

Thanks KSIR. There’s also a  Chinese VC who said 凡事看长远。