22 August 2025 | 11:39PM HKT Tencent Holdings (0700.HK): Europe NDR highlights: AI empowering long runways of growth across business lines; Buy We hosted Tencent's Chief Strategy Officer Mr. James Mitchell and the investor relations team with investors in Europe over Aug 18-22. Key investor focus areas/topics included: 1) Efficient scaling of AI capex and inference efficiency, where the company highlights lower capex intensity vs. global peers with cost efficiency across racks/land/data center alongside low ...

Core Viewpoint - Analysts are optimistic about Tencent, raising the consensus target price to HKD 688, indicating a potential upside of nearly 16% [1][2] Group 1: Analyst Upgrades - Over twenty analysts have raised Tencent's target price since the earnings report, with a consensus increase of over 5% from HKD 594.50 to HKD 688 [2] - Goldman Sachs has increased its target price from HKD 658 to HKD 701, while also raising revenue and earnings per share forecasts for 2025 to 2027 by 1-6% [3] Group 2: Financial Performance - Tencent's Q2 revenue grew by 15% year-on-year to RMB 184.5 billion, with major business segments like advertising showing double-digit growth [5] - The strong performance is attributed to AI-driven efficiency improvements [5] Group 3: Growth Drivers - AI is identified as a key growth engine, enhancing the efficiency of advertising and gaming businesses, leading to significant revenue increases [5] - The advertising business, particularly through platforms like video accounts, has substantial growth potential due to its low current commercialization level [6] - Tencent's gaming business outlook is stable, supported by new major game releases and a "platformization" strategy, with upcoming mobile game "Valorant Mobile" expected to drive growth [7]

Investment Rating - The report maintains a "Buy" rating for Tencent Holdings with a target price raised to HK$735 from HK$699, indicating an expected return of 25.4% [7][13]. Core Insights - Tencent's accelerated top-line growth of 15% year-over-year in Q2 2025 is attributed to successful AI investments across various segments, including marketing services, gaming, and business services [3][15]. - The company is leveraging AI to enhance consumer applications, particularly in gaming and advertising, which has led to significant revenue growth in these areas [3][4][17]. - The report highlights a strong performance in both domestic and international gaming revenues, with domestic games growing by 24% year-over-year and international games by 35% year-over-year [19][30][36]. Summary by Sections Financial Performance - Total revenues for Q2 2025 reached Rmb184.5 billion, reflecting a 15% year-over-year increase, with gross profit, operating profit, and net profit growing by 22%, 18%, and 20% respectively [15][16]. - Non-IFRS net profit was Rmb63.1 billion, a 10% year-over-year increase, exceeding consensus estimates [16]. Advertising Revenue - Advertising revenues grew by 20% year-over-year to Rmb35.8 billion, driven by AI enhancements in the advertising platform and increased demand across Video Accounts, Mini Programs, and Weixin Search [4][37]. - Video account revenues and mini program revenues both saw a 50% year-over-year increase, while Weixin search revenues grew by 60% year-over-year [4][37]. Gaming Segment - Domestic game revenues increased by 17% year-over-year to Rmb40.4 billion, supported by new releases and evergreen titles [30]. - International game revenues grew by 35% year-over-year to Rmb18.8 billion, driven by key titles and new releases [36]. Business Services and FinTech - Revenues from FinTech and Business Services grew by 10% year-over-year to Rmb55.5 billion, with strong performance in consumer loan services and commercial payment activities [44]. - Business services revenue growth was driven by increased demand for AI-related services, including GPU rentals and API token usage [25][44]. Future Outlook - The report projects continued growth in gaming and advertising, with domestic games expected to grow by 15% year-over-year and international games by 22% year-over-year in Q3 2025 [46]. - Overall, the company is positioned for sustainable growth, with a focus on enhancing AI capabilities and expanding its ecosystem [3][25].

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].

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the **Chinese online gaming industry**, highlighting three emerging trends: growth in PC gaming, the rise of shooting games, and the performance of major titles with high daily active users (DAU) [1][2][3]. Key Trends 1. **PC Gaming Growth** - The Chinese PC gaming market has shown solid growth, driven by successful cross-platform titles like **Delta Force** and **Wukong**. The growth rate for PC games was **5% year-over-year (YoY)** in the first half of 2025 [5]. - Payment top-up channels, particularly proprietary platforms like **QQ** and **Weixin**, have gained traction, accounting for **40%-50%** of total mobile game grossing [2][29]. 2. **Rise of Shooting Games** - Shooting games represent **30%** of global lifetime grossing on the PC platform **STEAM**, but only **15%** of China's mobile game grossing in the first half of 2025 [3][12]. - The genre is expected to grow due to new gameplay formats like **extraction shooters**, with **Tencent** positioned as a key beneficiary [3][21]. 3. **Performance of High DAU Titles** - Major titles such as **Honor of Kings** (HoK) and **Where Winds Meet** (WWM) are expected to outperform due to a light pipeline in the second half of 2025 [4]. - Smaller studios are also gaining traction with innovative titles like **Whiteout Survival** and **Supernatural Operations** [4]. Market Performance - The overall Chinese PC/mobile game market grew **5%** and **17% YoY** respectively in the first half of 2025, compared to **3%** and **5%** in 2024 [5]. - **Tencent** and **Bilibili** gained market share in the iOS mobile game market in 1H25, but faced challenges in July due to a high base effect [5][48]. Stock Recommendations - The report maintains a **Buy** rating on **Tencent**, **NetEase**, and **Bilibili**, citing their strong capabilities in developing new hits and rejuvenating existing titles [6][9]. - Key upcoming titles include **Tencent's Valorant Mobile** and **HoK World**, and **NetEase's Ananta** and **Sea of Remnants** [6][25]. Additional Insights - The report notes that traditional app stores still provide better reach to new users, and any reduction in fees by these stores could impact gaming companies' incentives to diversify their top-up channels [2]. - The rise of cross-platform games is highlighted, with successful examples including **Genshin Impact** and **Where Winds Meet**, which cater to a global audience [31]. Conclusion - The Chinese online gaming industry is poised for continued growth, particularly in the PC segment and shooting game genre, with major players like Tencent and NetEase expected to capitalize on these trends. The focus on innovative gameplay and cross-platform capabilities will be crucial for maintaining competitive advantages in this rapidly evolving market [1][2][3][4][5][6].

Tencent Holdings Equity Research Summary Company Overview - **Company**: Tencent Holdings Limited - **Industry**: Internet and Online Services in the People's Republic of China (PRC) - **Segments**: Internet value-added services, mobile and telecommunications value-added services, online advertising, and others [23][24] Key Financial Metrics - **Revenue Growth**: Expected total revenue growth of approximately 9.7% YoY to about RMB 177 billion in 2Q [2][15] - **Online Games Revenue**: Anticipated increase of about 12% YoY to approximately RMB 54.4 billion, driven by evergreen titles [2][15] - **Marketing Services Revenue**: Expected to grow about 17% YoY to RMB 35 billion, supported by traffic growth from video accounts and AI improvements [2][15] - **Fintech and Business Services (FBS)**: Estimated revenue growth of 7% YoY to RMB 54 billion [2][15] - **Non-IFRS Operating Profit**: Projected to grow 13% to about RMB 66 billion [2][15] - **Non-IFRS Earnings**: Expected to reach about RMB 62.5 billion, largely unchanged [2][15] Core Insights and Strategies - **AI Strategy**: The company maintains a robust AI strategy across various segments, which is expected to enhance operational efficiency and revenue generation [2][3][15] - **Gaming Strategy**: Focus on rejuvenating existing games and developing new franchises, with Delta Force achieving a record peak DAU of 12 million in April 2025 [2][3][15] - **Advertising Outlook**: Multiple growth drivers identified, including increased ad loads on Video Accounts and improvements in click-through rates (CTR) due to AI [2][3][15] - **Fintech Focus**: Emphasis on risk management within fintech operations, with a positive outlook on commercial payment trends [3][15] Investment Thesis - **Rating**: Buy - **Price Target**: HK$ 665, representing a potential upside of 34% from the current price of HK$ 497.60 [6][15] - **Valuation Methodology**: Based on a sum-of-the-parts (SOTP) valuation approach [15][24] - **Risks**: Include unsuccessful launches of new games, slower-than-expected growth in online ads, and aggressive investments in new initiatives [18][24] Sustainability and Corporate Responsibility - **Carbon Neutrality Goal**: Pledged to achieve carbon neutrality across operations and supply chains by 2030 [12][13] - **Data Security and Employee Engagement**: Prioritizing data security and employee diversity as key material issues [12][13] Conclusion Tencent Holdings is positioned for solid growth driven by its diverse revenue streams, strong gaming portfolio, and strategic investments in AI and fintech. The company’s commitment to sustainability and risk management further enhances its long-term investment appeal.

Investment Rating - The report maintains a positive outlook on experience and learning-related services consumption names, recommending eight quality consumer services with an average forward P/E of 17x and 19% year-on-year sales growth [31]. Core Insights - Despite overall lackluster consumption trends in China post-reopening, selected "new consumption" stocks have significantly outperformed the MXCN index, with an average weighted index for Lunar New Year consumption rising by 21% compared to 10% for MXCN through June 12 [5][6]. - The ACGN sector has shown remarkable performance, with stocks like Pop Mart and Bloks rising by 155% and 94% respectively, while other sectors like Hainan travel/shopping and e-bikes lagged behind [5][6]. - The report highlights a structural shift in consumer behavior towards services over goods, with services consumption categories such as Transport & Communications and Education, Culture & Recreational Services growing at 15% and 18% year-on-year in 2023, compared to overall consumption growth of 9% [5][6]. - The report identifies nine experience and learning-related consumption names that are expected to benefit from favorable seasonal spending trends during the summer [5][31]. Summary by Sections New Consumption Trends - Two key trends identified are affordable treats, including ACGN goods and government-subsidized trade-ins, and experience-related consumption such as movies and travel [6][31]. - The report notes that leading affordable treats have outperformed year-to-date, indicating a shift in consumer preferences towards smaller pleasures rather than big-ticket items [5][6]. Valuation and Growth Potential - Valuation levels for top new consumption names are now comparable to established global brands, with significant upside potential for future growth [5][6]. - The report emphasizes that the ability to surprise on future growth is crucial for maintaining valuations in the new consumption space [5][6]. Recommendations - The report recommends focusing on experience and learning-related services, which are expected to benefit from seasonal trends and a structural shift towards services consumption in China [31]. - Specific companies highlighted include Tencent, NetEase, Trip.com, and Kuaishou, which are positioned well for growth in the digital entertainment and travel sectors [31].

Investment Rating - The report assigns a "Buy" rating to Tencent, NetEase, Alibaba, Kuaishou, and Bilibili, indicating a favorable outlook for these companies [8][9][10]. Core Insights - Content consumption in the gaming and entertainment sectors has shown resilience compared to goods and services year-to-date, creating a high entry barrier for new competitors, benefiting established players like Tencent and NetEase [2][3]. - The outlook for AI has been tempered by lower-than-expected capital expenditure and cloud revenue growth, but confidence is expected to return with improved user statistics and cloud growth acceleration [2][3]. - E-commerce remains highly competitive, with the 618 shopping festival seen as a pivotal moment for food delivery services, impacting the competitive landscape [2][3]. Summary by Sections Investment Preferences - The report favors sub-sectors with higher earnings visibility and less exposure to macroeconomic conditions, particularly online games, with Tencent expected to benefit from robust earnings growth driven by popular titles and new launches [3][8]. - NetEase is also highlighted for its recovery in mobile game growth and new game launches, while Alibaba is noted for potential cloud growth acceleration that could enhance its AI valuation [3][8]. - Bilibili has been upgraded due to improved margin outlook and resilient performance in games and advertising, while Kuaishou is recognized for its growth visibility in ads and attractive valuation [3][8]. Company Valuations - Tencent's target price is set at HKD630.00, reflecting a 22% upside from its current price of HKD515.00, with a PE ratio of 20.1x for 2025 [9][24]. - NetEase's target price is USD150.00, indicating a 17% upside from USD128.63, with a PE ratio of 17.0x for 2025 [9][24]. - Alibaba's target price is USD176.00, suggesting a 47% upside from USD119.96, with a PE ratio of 17.0x for 2025 [9][24]. - Kuaishou's target price is HKD75.00, representing a 38% upside from HKD54.50, with a PE ratio of 15.0x for 2025 [9][24]. - Bilibili's target price is USD22.50, indicating a 22% upside from USD18.48, with a PE ratio of 27.1x for 2025 [9][24].