Tencent announced 4Q24 financial results: total revenue grew by 11% YoY to RMB172.4bn, 3/2% ahead of our/Bloomberg consensus estimates, mainly due to better-than-expected growth of games & marketing revenue. During the period, non-IFRS net income was up by 30% YoY to RMB55.3bn, in line with our estimate; but net margin is slightly below our estimate, due to the increased R&D expenses including staff costs and depreciation expenses related to AI investment. Tencent plans to further step up AI investment in FY25 (RMB80- 100bn capex with more R&D and marketing support to AI), which may drag the pace of margin expansion but unlock long-term growth opportunities of AI cloud, marketing and games businesses in our view. We lift our FY25-26E total revenue forecast by 1%, and raise our SOTP-derived TP to HK$625.0 (previous: HK$525.0) given the rerating of several business lines. Maintain BUY.
　　Games and marketing businesses delivered better-than-expected growth. Games revenue was up by 20% YoY to RMB49.2bn in 4Q24 (4% ahead of consensus estimate). Domestic games revenue grew by 23% YoY to RMB33.2bn in 4Q24, driven by both evergreen games and new games such as DnF Mobile and Delta Force. Gross receipts of Honor of Kings grew by a double-digit % YoY in 4Q24; and total gross receipts of Delta Force surpassed RMB1bn in 4Q24. International games revenue grew by 15% YoY to RMB16.0bn in 4Q24, primarily attributable to robust growth of PUBG Mobile and Brawl Stars. Marketing services revenue grew by 17.5% YoY to RMB35.0bn in 4Q24 (3% ahead of consensus). Key growth drivers such as Video Accounts and Weixin Search recorded over 60% and over 100% YoY growth of marketing revenue respectively in 4Q24. AI continues to enhance use engagement and click-through rates.
　　Increasing capex to unlock growth opportunities. Fintech and Business Services (FBS) revenue grew by 3% YoY to RMB56.1bn in 4Q24. Fintech revenue resumed low single-digit % YoY growth in 4Q24 driven by wealth management and consumer loan services. Business services grew modestly but was slower than peers, as the increasing internal usage of GPUs limited its GPUs offering to external customers. As a result, Tencent stepped up GPUs procurement from 4Q24 onward, with capex up by 386% YoY to RMB36.6bn in 4Q24. And management expects capex to reach low teen % of total revenue in FY25 (c.RMB80-100bn, +5-30% YoY), which will accelerate cloud service revenue growth.
　　Major AI updates. Tencent adopts a multi-model strategy to provide best AI experience and services to enterprises and consumers: 1) consumer- facing app: Yuanbao DAU grew by over 20-fold from Feb to Mar; 2) enterprise services: AI cloud revenue nearly doubled YoY in FY24 and MAUs of Tencent Meeting AI function also doubled YoY to 15mn; 3) empowering existing businesses: marketing services revenue grew by 20% YoY in 2024 thanks to AI targeting and Gen-AI created ads; enhancing games production efficiency and improving games experience through integrating LLM capabilities into legacy or new games.
　　Expect margin expansion to slow down. Overall GPM was up by 2.6ppts YoY to 52.6% in 4Q24, primarily due to increased revenue contribution from high-margin business. We expect the pace of margin expansion to slow down in FY25E, as increased AI investment weighs on margin. Tencent continued to maintain decent shareholder return, planning to increase annual dividend by 32% to HK$41bn and repurchase at least HK$80bn shares in FY25 (c.2% of market cap).