Global Research ab 26 January 2026 First Read China Internet Sector China ad pulse check: 2026 outlook and impacts from new ad tax policy Growth: 2026E stable; bottom-up bright spots to offset soft macro Growth: We expect overall China ad growth to remain stable at 9.5% in 2026E (2025E's 9.6%), based on takeaways from our recent channel checks with leading ad agencies in China and catch-ups with major listcos. We expect ad growth to still outperform underlying consumption growth (UBSe 4.8/4.4% in 2025/26E r ...

Core Viewpoint - The company is expected to achieve a 13% year-over-year revenue growth in Q4 2025, driven by strong performance in online gaming and online advertising, despite slightly lower operating profit forecasts due to increased AI-related operating expenses [1][2]. Group 1: Revenue and Profit Forecasts - Total revenue is projected to grow 13% year-over-year to RMB194.8 billion, aligning with consensus expectations [2]. - Value-added services (VAS) revenue is estimated to increase by 14% year-over-year, supported by a 7% growth in social networks and an 18% growth in online gaming [2]. - Online gaming is expected to see a solid 15% year-over-year growth in domestic games, aided by popular franchises and the launch of Valorant Mobile [2]. - Online advertising revenue is anticipated to remain resilient with a 17% year-over-year increase, driven by video accounts, Weixin search, and Moments, benefiting from AI enhancements [2]. - Adjusted operating profit is forecasted to grow 15% year-over-year to RMB68.4 billion, factoring in AI-related operating expenses [2]. Group 2: AI Strategies and Growth Engines - The company is committed to executing consistent AI strategies to foster high-quality growth engines, leveraging its user base, communities, content, infrastructure, and monetization ecosystems [1]. - Key AI strategies include upgrading foundational large language models (LLM), integrating more in-house functionalities, developing diverse AI products, and prioritizing internal capabilities over external monetization [1]. - The company anticipates sustainable growth momentum in gaming and online advertising, supported by ongoing AI investments [1]. Group 3: Valuation and Target Price - The company maintains a "BUY" rating and has slightly raised the sum-of-the-parts (SOTP) target price to HK$742.0 based on updated estimates [4]. - The valuation multiples assigned for 2026E include 18.0x price-to-earnings ratio (PER) for online gaming, 20.0x PER for online advertising, 13.0x PER for fintech and business services, and 3x price-to-sales ratio (PSR) for cloud services [4].

Citi Research Jan 5, 2026 Pan-Asia Internet Pan-Asia Internet Analysts | | Country | Contact Details | | | --- | --- | --- | --- | | Asia Pacific | | | | | Alicia Yap | Head of Pan Asia Internet Research | +852 2501 2773 | alicia.yap@citi.com | | Brian Gong | China Internet | +852 2501 2747 | brian.gong@citi.com | | Vicky Wei | China Internet | +852 2501 2489 | vicky.wei@citi.com | | Nelson Cheung | China Internet | +852 2501 2728 | nelson.cheung@citi.com | | Ferry Wong | Asean Internet | +62 21 2924 9213 | ...

Summary of Key Points from the Conference Call Industry Overview - The China internet sector has shown strong performance in 2025, with a year-to-date return of +36.5%, outperforming Southeast Asia (+18.3%), India (+17.6%), Japan (+16.8%), the US (+16.2%), and Korea (+12.8%) [1][16] - Geopolitical tensions and AI supply-chain issues are expected to keep China's internet companies trading at discounts compared to global peers [1][2] Core Themes and Insights - **AI Competition and Productivity Gains**: The competition among AI players in China is anticipated to intensify in 2026, focusing on AI cloud infrastructure, chatbots, and applications [1][2] - **Monetization Lag**: Monetization of AI technologies is expected to lag behind user traffic growth, particularly when compared to global peers [1][2] - **Top Picks for 1H26**: Recommended stocks include Tencent and Alibaba as core AI plays, Trip.com and NetEase for stable earnings growth, and Century Huatong among A shares [1][2] AI Market Dynamics - **AI Chatbot Penetration**: ChatGPT leads globally with 800 million monthly active users (MAUs), while Bytedance's Dola and Doubao combined rank third with approximately 250 million MAUs [3] - **User Traffic Competition**: Major internet players are competing for user traffic through AI chatbots, which is crucial for future ecosystem monetization [2] Consumer Behavior and Spending - **Leisure and Entertainment Spending**: The adoption of AI tools is expected to enhance consumer productivity, leading to increased spending on leisure and entertainment, particularly in travel and online gaming [4] - **Stable Earnings Growth**: Online travel agencies (OTAs) and gaming companies are projected to benefit from resilient consumer spending [4] Investment Risks - **Geopolitical and Economic Risks**: Risks include geopolitical tensions, AI supply-chain constraints, muted consumer sentiment without stimulus policies, and intensified competition in AI applications [5] - **Profitability Concerns**: The potential for profit lock-in through membership investments and a slowdown in capital returns are highlighted as significant risks [5] Financial Performance Insights - **3Q25 Results**: Among 44 internet companies, 18 reported revenue beats, and 27 reported earnings beats. The guidance for 4Q25 showed mixed results, with some companies exceeding expectations while others fell short [6][10] - **Year-to-Date Share Price Performance**: Alibaba leads with an 86% return, followed by Tencent at 47%. Meituan has underperformed with a -32% return [16][28] Conclusion - The China internet sector is poised for growth driven by AI advancements, but faces challenges from geopolitical risks and competitive pressures. Companies like Tencent and Alibaba are positioned as key players in this evolving landscape, while consumer spending trends indicate resilience in leisure and entertainment sectors.

Tencent Holdings Research Summary Company Overview - **Company**: Tencent Holdings - **Sector**: Internet/e-Commerce - **Description**: Tencent is a leading provider of messaging services, value-added services, online games, advertising, and e-commerce in China. The social app Weixin has over 1 billion domestic accounts, and Tencent also offers enterprise services like Cloud and IT solutions [11][12]. Key Financial Metrics - **3Q25 Net Income**: Adjusted net income was RMB 70.6 billion, up 18% YoY, exceeding consensus by 7% [16]. - **Revenue**: 3Q25 revenue reached RMB 192.9 billion, a 15% YoY increase [16]. - **Capex**: 3Q25 capital expenditure was RMB 13 billion, below consensus due to chip availability issues [1]. - **2025E Revenue**: Expected to be RMB 750 billion, with a gross profit of RMB 423 billion [15]. Investment Rating and Price Objective - **Rating**: BUY - **Price Objective**: HKD 780, based on a sum-of-the-parts (SOTP) valuation [3][17]. Growth Drivers - **AI Strategy**: Tencent is focusing on AI applications, integrating AI-supported use cases into Weixin. The company is expected to prioritize internal chip use over external sales due to supply constraints [1]. - **Gaming Segment**: Anticipated growth from titles like Delta Force, Valorant Mobile, and Honor of Kings (HoK) [2]. - **Advertising Revenue**: Growth expected from Video Account and Weixin search ads, which have higher gross margins [2]. Financial Projections - **2025E Non-IFRS Diluted EPS**: Expected to be RMB 28.13, reflecting a 18.8% YoY increase [4][15]. - **2026E Revenue**: Projected to reach RMB 821 billion, with a gross profit margin of 57% [15]. - **Free Cash Flow**: Expected to be RMB 145.9 billion in 2025 [9]. Risks and Challenges - **Competition**: Intensifying competition in the gaming and advertising sectors [3]. - **Regulatory Uncertainty**: Potential regulatory challenges in fintech and gaming [18]. - **Macroeconomic Factors**: A weaker macro environment could impact advertising and fintech revenues [18]. Additional Insights - **Market Position**: Tencent maintains a strong market leadership position across various segments, with significant growth potential in monetization through Weixin [12]. - **AI and E-commerce Potential**: The company has substantial upside potential from AI applications and e-commerce growth [12]. - **Debt Management**: Net debt is projected to decrease significantly by 2027, indicating improved financial health [9]. Conclusion Tencent Holdings is positioned for continued growth driven by its strong market presence, innovative AI strategies, and robust gaming and advertising segments. However, investors should remain cautious of competitive pressures and regulatory risks that could impact future performance.

Summary of Tencent Holdings (0700.HK) Conference Call Company Overview - **Company**: Tencent Holdings (0700.HK) - **Event**: Asia Leaders Conference 2025 - **Date**: September 4, 2025 - **Presenter**: Mr. James Mitchell, Chief Strategy Officer Key Industry Insights 1. **AI Model Development**: Tencent has re-architected its AI model strategy, with Hunyuan models achieving state-of-the-art (SOTA) performance in China, closing the gap with global models. The launch of HunyuanWorld-Voyager 3D model and its leading rankings on Hugging Face were highlighted [1][2][3] 2. **Revenue Streams from AI**: The company is leveraging AI to enhance revenue across gaming and marketing services, with high margins expected to offset GPU depreciation expenses. Tencent's non-GPU capital expenditure is lower compared to global peers due to cost efficiencies [2][3] 3. **Gaming Industry Growth**: Tencent is well-positioned in the gaming sector, which continues to grow, particularly in China and emerging markets. AI is expected to improve user experience and R&D efficiency, with significant content production efficiency gains anticipated [3][4] 4. **Advertising Services**: Tencent is aggressively deploying AI in its advertising business, which currently captures one-third of China's internet time but is under-monetized. AI-driven ad technology is expected to enhance click-through rates and conversion [8][9] Financial Performance and Projections 1. **Revenue Growth**: Tencent forecasts a revenue growth of 13% year-over-year for 3Q25E and 2025E, with an 18% and 17% growth in EPS respectively [11][12] 2. **Financial Summary**: - Total revenues projected to reach RMB 660.26 billion in 2024 and RMB 746.72 billion in 2025E - Net profit (Non-GAAP) expected to be RMB 222.70 billion in 2024 and RMB 256.39 billion in 2025E - Diluted EPS (Non-GAAP) projected at RMB 23.67 for 2024 and RMB 27.69 for 2025E [13][16] Strategic Initiatives 1. **Capital Allocation**: Tencent is committed to disciplined capital allocation, with plans for share buybacks and dividends supported by improved liquidity in China [10][11] 2. **E-commerce and Cloud Growth**: The company is enhancing its Weixin super-app and expanding its closed-loop e-commerce capabilities, positioning Tencent Cloud as a top player in China's public cloud market [11][12] Risks and Challenges 1. **Industry Competition**: Increased competition in performance-based advertising and potential delays in game launches could impact growth [14] 2. **FinTech and Cloud Growth**: Slower-than-expected growth in these sectors poses a risk to overall performance [14] Conclusion - Tencent is positioned as a key beneficiary of AI advancements in the Chinese internet landscape, with a robust growth outlook across its major business lines. The company maintains a "Buy" rating with a target price of HK$701, reflecting a 17.1% upside potential from the current price of HK$598.50 [11][16]

Summary of Tencent Holdings (700 HK) Conference Call Company Overview - **Company**: Tencent Holdings - **Industry**: Internet Software & Services - **Market Cap**: Approximately USD 683.3 billion Key Points and Arguments Financial Performance - **2Q25 Revenue**: Reported at RMB 184.5 billion, beating consensus expectations by 3% [16] - **Growth Rate**: Year-over-year revenue growth of 15% [16] - **Operating Profit**: Non-IFRS operating profit of RMB 69.2 billion, also beating expectations by 4% [16] - **Net Profit**: Non-IFRS net income of RMB 63.1 billion, exceeding consensus by 3% [16] Segment Performance 1. **Domestic Games (DG)**: - Revenue grew by 17% year-over-year, driven by titles like Delta Force and Honor of Kings [17] - Delta Force's daily active users (DAU) exceeded 20 million in July 2025 [17] 2. **International Games (IG)**: - Revenue surged by 35% year-over-year, driven by Supercell's titles and PUBG Mobile [18] - Clash Royale's gross billings reached a seven-year high in June 2025 [18] 3. **Marketing Services**: - Revenue increased by 20% year-over-year, supported by AI-driven improvements [21] - Video Account, Mini Programs, and Weixin Search ads grew by 50%, 50%, and 60% year-over-year, respectively [21] 4. **Fintech and Business Services (FBS)**: - Revenue grew by 10% year-over-year, driven by consumer loans and commercial payments [22] - Total commercial payment volume resumed year-over-year growth in 2Q25 [22] Growth Projections - **Revenue Estimates**: Increased for 2025-2027, with domestic games up by 2-7%, international games by 3-5%, and ad revenue by 2-6% [1] - **Target Price**: Raised to HKD 690 from HKD 650, implying an upside of approximately 18% [1][4] Operational Efficiency - **Gross Profit Margin (GPM)**: Total GPM improved to 57%, beating expectations by 2 percentage points [16] - **Cost Management**: General and administrative expenses as a percentage of revenue remained flat at 6.3% [25] Shareholder Returns - **Share Buybacks**: Tencent has repurchased HKD 40 billion worth of shares year-to-date, with a commitment of at least HKD 80 billion for 2025 [49][47] - **Dividends**: Planned dividend payments of HKD 41 billion in 2025 [52] Risks and Challenges - **Regulatory Risks**: Potential challenges in obtaining monetization approvals for games and regulatory headwinds in the internet sector [52] - **Market Conditions**: A deeper macroeconomic slowdown could impact advertising budgets [52] Additional Insights - **AI Investments**: Continued benefits from AI investments are expected to drive sustainable growth in advertising and operational efficiency [8] - **Emerging Titles**: Delta Force is on track to become an evergreen title, with the upcoming launch of Valorant Mobile in China being closely watched [8] Conclusion Tencent Holdings demonstrated strong financial performance in 2Q25, with significant growth across its core segments. The company is well-positioned for future growth, supported by strategic investments in AI and a robust pipeline of game titles. However, it faces potential regulatory challenges and macroeconomic risks that could impact its performance. The raised target price reflects confidence in the company's growth trajectory and operational efficiency.

Summary of Tencent Holdings Investor Meeting Company Overview - **Company**: Tencent Holdings - **Sector**: Internet/e-Commerce - **Description**: Tencent is a leading provider of messaging services, value-added services, online games, and advertising in China, with Weixin having over 1 billion domestic accounts [10][11]. Key Takeaways from the Investor Meeting AI Product Development - Tencent is investing in AI products that are in the post-launch but pre-monetization phase, including: - **Yuanbao app**: Achieved product-market fit and moved to launch phase [1] - **QQ Browser**: Recently upgraded to AI Browser [1] - **Weixin AI**: Early in the product-market fit journey [1] - Monetization is expected to begin product by product after several quarters, funded through operating leverage from existing businesses [1]. - The near-term cost impact will primarily come from depreciation, with profit being back-end loaded in the GPU lifecycle [1]. Financial Projections - **Net Income (Adjusted)**: - 2023A: CNY 157,688 million - 2024A: CNY 222,703 million - 2025E: CNY 251,880 million [3] - **EPS**: - 2023A: CNY 11.99 - 2024A: CNY 20.63 - 2025E: CNY 22.65 [3] - **P/E Ratio**: - 2025E: 20.75x [3] Game Experience and User Retention - AI enhances game experience through improved player onboarding, coaching, interaction, and cheating prevention, leading to better user retention [2]. - Tencent's key mobile games have shown an upward trend in 30-day user retention [2][19]. Business Services Growth Drivers - The Business Services segment has four structural drivers: 1. Mini Shops commission 2. CRM service and WeCom enterprise software 3. Security and real-time communications solutions 4. GPU rental [3] - Tencent believes in the long-term potential of enterprise services in China, focusing on software services for better margins and competitive products [3]. Fintech Services Growth - The Fintech segment has three structural drivers: 1. Consistent growth in wealth management 2. Resumed growth in credit business 3. Improvement in payment business after a decline [15]. Mini Shops in Weixin Ecosystem - Mini Shops are rapidly growing GMV and enhancing linkages with other Weixin activities, with multiple successful eCommerce templates to learn from [14]. - Monetization potential includes higher take rates and improved ad targeting due to SKU-level granularity [14]. Investment Rationale - The company maintains a **Buy** rating due to: - Strong market leadership - Growth potential from Weixin monetization - Resilient game business growth - AI and eCommerce opportunities [11]. Risks and Opportunities - **Downside Risks**: 1. Competition from new platforms 2. Regulatory challenges in fintech and gaming 3. Weak macroeconomic conditions [23]. - **Upside Risks**: 1. Faster-than-expected macro recovery 2. Successful new game launches 3. Synergies from ecosystem collaborations [23]. Conclusion - Tencent Holdings is positioned for growth through its AI investments, strong game retention, and expanding business services. The company faces risks from competition and regulation but has significant upside potential from its diverse business segments and market leadership.

Investment Rating - The report maintains a "Buy" rating for Tencent Holdings with a target price of HK$695, implying an expected share price return of 33.5% and a total return of 34.4% [4][8]. Core Insights - Tencent is positioned as a strong player in AI applications, leveraging its comprehensive Weixin ecosystem to enhance user targeting, content generation, and game stickiness through AI optimization [1][2]. - The company has made significant advancements in its Hunyuan large model, achieving top rankings in various benchmarks and expanding its multi-modal capabilities [3][6]. - Tencent Cloud is experiencing a notable increase in API calls, particularly in automatic speech recognition and text-to-speech, indicating a rapid adoption of AI technologies [1][3]. Summary by Sections AI Development and Infrastructure - Tencent aims to build an AI-native ecosystem to enhance its service capabilities for enterprise customers, focusing on large model innovation and infrastructure upgrades [2][3]. - The Hunyuan Turbo-S model ranks 8 in the Chatbot Arena benchmark and is among the top 10 for coding and math capabilities, showcasing Tencent's competitive edge in AI [3]. Agent Development - The Smart Agent Development Platform has been upgraded to enhance multi-agent collaboration and improve efficiency in corporate use cases [4][6]. - This platform is designed to support external customers in setting up their own AI agents, reflecting Tencent's commitment to expanding its AI offerings [6]. Knowledge Base and Product Matrix - Tencent has introduced several products to meet enterprise demands, including the Lexiang knowledge base for knowledge coordination and the marketing cloud agent for automated customer targeting [7]. - The integration of Tencent Hunyuan and DeepSeek large models aims to enhance individual employee productivity through AI Q&A and content generation [7]. Valuation - The target price of HK$695 is derived from a sum-of-the-parts (SOTP) valuation approach, applying various price-to-earnings (P/E) multiples across different business segments [8]. - The valuation breakdown includes online games, online advertising, social networks, fintech, and cloud/business services, indicating a diversified revenue stream [8].

Summary of Tencent Holdings (700 HK) Conference Call Company Overview - **Company**: Tencent Holdings - **Sector**: Internet Software & Services - **Market Cap**: HKD 4,787,479 million (USD 613,996 million) [13][5] Key Discussion Points 1. **Strong Growth Prospects**: - Tencent's 1Q25 results exceeded expectations, driven by robust performance in domestic games and advertising. Revenue growth for domestic games is revised from 8% to 13% for 2025 [2][9] - The company reported a total revenue of RMB 180,022 million for 1Q25, reflecting a 13% year-over-year increase [17][9] 2. **Game Performance**: - Domestic games revenue grew by 24% year-over-year, significantly above the consensus of 15%, with key titles like Honour of Kings and Delta Force contributing to this growth [18][9] - International games revenue also saw a 23% increase, driven by titles such as Brawl Stars and PUBG Mobile [19][9] 3. **Advertising and Marketing Services**: - Marketing services revenue increased by 20% year-over-year, supported by higher user engagement and AI enhancements to the ad platform [21][9] - Video Account ad revenue grew over 60% year-over-year, indicating strong demand for advertising tools [21][9] 4. **AI Integration**: - Tencent is integrating AI features into its Weixin ecosystem, which is expected to enhance content generation and improve advertising effectiveness over time [2][9] - The company is leveraging its unique social graphs and community capabilities to differentiate its AI offerings from competitors [3][9] 5. **Financial Performance**: - Non-IFRS net income for 1Q25 was RMB 61,329 million, a 22% increase year-over-year [17][9] - The gross profit margin (GPM) improved by 2 percentage points to 56% [23][9] 6. **Capital Expenditure and Share Buybacks**: - Tencent plans to repurchase at least HKD 80 billion worth of shares in 2025, having already repurchased HKD 21 billion year-to-date [54][56] - The company incurred RMB 27 billion in capital expenditures in 1Q25, representing 15% of revenue [17][9] 7. **Future Outlook**: - Revenue for 2025 is projected at RMB 728,386 million, reflecting a 10% year-over-year growth [53][9] - The target price remains unchanged at HKD 630, indicating a potential upside of 20.9% from the current share price of HKD 521 [9][13] Financial Highlights - **Revenue Breakdown for 1Q25**: - Value-Added Services (VAS): RMB 92,133 million, up 17% YoY - Marketing Services: RMB 31,853 million, up 20% YoY - Fintech and Business Services: RMB 54,907 million, up 5% YoY [17][9] - **Earnings Per Share (EPS)**: - 2025 EPS estimate raised to CNY 28.72, reflecting a 1.6% increase from previous estimates [6][9] Risks and Considerations - Potential risks include regulatory challenges in the gaming sector, macroeconomic slowdowns affecting advertising budgets, and changes in user preferences [59][9] Conclusion - Tencent Holdings continues to demonstrate strong growth across its gaming and advertising segments, with significant investments in AI and share buybacks. The company maintains a positive outlook for 2025, supported by robust financial performance and strategic initiatives.