Core Viewpoint - Investors are increasingly favoring Tencent Holdings Ltd. as a safer investment amid concerns over a potential bubble in technology stocks, particularly in the artificial intelligence sector [1]. Group 1: Company Performance - Tencent is expected to be one of the few major Chinese tech companies to report positive profit growth in the upcoming results, with a projected earnings growth of 5% year-over-year for the September-ended quarter [6]. - The company's market value has increased by approximately $280 billion this year, driven by strong performance in its online games business [1]. - Tencent's shares have surged 58% this year, yet they still trade at a significant discount compared to global tech peers like Amazon.com Inc. and Nintendo Co. on earnings-based multiples [4]. Group 2: Competitive Landscape - Tencent faces less competition in its sector, which contributes to its defensive growth profile, making it an attractive option for investors [3]. - In contrast, competitors such as Alibaba Group Holding Ltd. and JD.com Inc. are experiencing declines in earnings due to intense price wars and other market pressures, with estimated earnings declines of over 60% for these companies [6]. - The gaming sector, particularly Tencent's unique intellectual property, fosters strong player loyalty and price resiliency, unlike the steep discounting strategies seen in other sectors like online food delivery and electric vehicles [5]. Group 3: Market Sentiment - The stock has risen by 4.5% this month, reflecting positive investor sentiment, while rivals have seen declines [2]. - Short interest in Tencent is notably low, at less than 0.1% of its free float, indicating a shift in market sentiment towards the company [2].

Investment Rating - The report reiterates Tencent Holdings Ltd. as a "Top Pick" with an "Overweight" rating and raises the price target from HK$650.00 to HK$700.00, implying a 19% upside potential from the current price of HK$586.00 [1][6][48]. Core Insights - The successful deployment of AI across all business lines is expected to drive solid revenue growth, alleviating concerns about margin pressure from AI investments due to a favorable mix shift [1][12]. - The report highlights a strong performance in the second quarter (2Q), with revenue growth of 14.5% year-over-year, driven by significant contributions from online games and advertising [19][17]. - The management's focus on tracking AI effectiveness through various metrics indicates a strategic approach to leveraging AI for business growth [3][12]. Summary by Sections Financial Performance - Tencent reported a 2Q revenue of Rmb184.5 billion, a 14.5% increase year-over-year, with online games growing by 22.1% and advertising revenue increasing by 19.7% [17][19]. - Gross profit margin reached a record high of 56.9%, reflecting a 3.6 percentage point increase year-over-year [19][17]. - Non-IFRS operating profit grew by 19%, beating estimates, while net profit increased by 16.8% year-over-year [19][17]. Capital Expenditure and Growth Projections - The company maintained its capital expenditure guidance at a low teens percentage of total revenue for 2025, estimating Rmb97 billion for the year [2][3]. - Expectations for 3Q revenue growth are set at 12%, with non-IFRS operating profit growth projected at 14% [3][12]. Game and Advertising Segments - The gaming segment is expected to continue its momentum, with a projected 16% year-over-year growth in 3Q, driven by the launch of Valorant Mobile and strong performance from existing titles [4][3]. - Advertising revenue is anticipated to grow by 20% in 3Q, supported by successful AI ad technology deployment [4][12]. Valuation and Investment Strategy - The price target of HK$700 is derived from a sum-of-the-parts valuation, with HK$613 attributed to core businesses and HK$87 to associate investments, applying a 30% discount to investment value [38][39]. - The report emphasizes Tencent's position as a leading AI adopter with high ROI potential, particularly in consumer-facing AI applications [12][39].

Core Insights - Baidu is experiencing significant growth in its AI Cloud segment, which is becoming a key driver of the company's overall growth and profitability [1][5] - The company is facing macroeconomic pressures and regulatory uncertainties in China's tech landscape, but its cloud transformation indicates a shift in core business dynamics [1] Financial Performance - AI Cloud revenue increased by 42% year over year to RMB 6.7 billion, now accounting for 26% of Baidu's Core revenue, up from 20% a year earlier [2][9] - Non-GAAP operating margins for AI Cloud have reached the mid-teens, indicating a positive trend in profitability [5] Product and Service Development - Baidu's focus on full-stack AI infrastructure and model optimization has led to significant reductions in inference costs and improvements in output quality [3] - The recent launches of ERNIE 4.5 Turbo and ERNIE X1 Turbo are examples of the company's commitment to enhancing its AI offerings [3] Revenue Model Shift - The company has shifted its cloud revenue mix towards subscription-based models, which now constitute the majority of enterprise cloud sales [4] - Subscription revenues related to generative AI are growing at triple-digit rates for multiple quarters, indicating strong demand [4][9] Competitive Landscape - Baidu is competing with major players like Alibaba and Tencent in the AI Cloud space, both of which are expanding their cloud services aggressively [6][7] - Alibaba Cloud remains the market leader, leveraging its extensive ecosystem, while Tencent is integrating AI into its gaming and fintech platforms [6][7] Stock Performance and Valuation - Baidu's stock has declined by 5.3% over the past three months, contrasting with a 6.1% rise in the Zacks Internet - Services industry [8] - The forward 12-month price/earnings ratio for Baidu is 8.76, significantly lower than the industry average of 18.74 [13]