TENCENT HOLDINGS(700.HK)：2Q25 CLEAN BEAT;WELL-PROGRESSED AI EXECUTIONS

Core Viewpoint - The company demonstrated strong financial performance in 2Q25, with a 15% year-over-year topline growth, a gross profit margin (GPM) of 56.9%, and an adjusted operating profit of RMB69.2 billion, reflecting an 18% year-over-year increase, all surpassing consensus expectations [1][4]. Group 1: Financial Performance - Total revenue reached RMB184.5 billion, marking a 15% year-over-year increase, exceeding consensus by 3% and BOCIe by 2% [4]. - Domestic games revenue increased by 17% year-over-year, while overseas games revenue surged by 35% year-over-year [4]. - Advertising revenue grew by 20% year-over-year, driven by significant increases in video accounts, mini-programs, and Weixin search [4]. - Adjusted operating profit rose by 18% year-over-year to RMB69.2 billion, beating BOCIe estimates by 3% [4]. - Capital expenditures amounted to RMB19.1 billion, representing 10% of total revenue [4]. Group 2: AI Integration and Growth - The company is positioned as a beneficiary of AI, leveraging it for sustainable growth across core business segments and enhancing user experience and monetization [2]. - AI is expected to improve production, analysis, targeting, and recommendation capabilities in online advertising, contributing to increased return on investment [3][2]. - The company is committed to AI investments and product promotions, which are reflected in the raised gross profit forecasts due to a shift towards in-house titles and high-margin ad formats [3]. Group 3: Forecast Adjustments - Domestic games revenue forecasts have been raised by 0-1%, while overseas games revenue estimates have been increased by 4-6% [3]. - Online advertising revenue estimates have been uplifted by 1-2% to account for enhanced ROI from AI initiatives [3]. - The overall growth momentum is supported by a favorable revenue mix and channel optimization [3]. Group 4: Valuation and Recommendations - The company maintains a "BUY" rating and has raised the target price to HK$705.0, reflecting a 24x and 20x adjusted price-to-earnings ratio for 2025E and 2026E, respectively [1][4]. - The valuation is based on updated estimates and corresponding gross profit growth multiples for various segments [4].