China Merchants Securities: Upgrading the target price of Tencent Holdings (00700) to HK$700 to maintain the “Overweight” rating

The Zhitong Finance App learned that China Merchants Securities released a research report saying that the current valuation of Tencent Holdings (00700) is 18 times/16 times the price-earnings ratio for the 2025/2026 fiscal year, which is at the historical average level, compared with 17 times/15 times that of its Chinese counterpart and 25 times/23 times that of its American counterpart. With its powerful social networking moat and AI technology, it is expected that AI agents, advertising, commercialization of AI products, and AI-driven profit margin expansion will bring potential revenue and valuation opportunities for Tencent. Maintaining the “Overweight” rating and being optimistic about the company's unique market position, the target price was raised from HK$670 to HK$700.

According to the bank, Tencent's second-quarter results exceeded expectations, with revenue up 15% year over year, exceeding expectations by 3%; non-IFRS net profit increased 10% year over year, also exceeding expectations by 3%, mainly benefiting from improved profit margins in various business segments. All business lines showed strong growth momentum, enabled by AI, and the profit forecast for the 2025/2026 fiscal year was raised.

According to the report, due to chip supply restrictions, Tencent's capital expenditure for the second quarter was 19.1 billion yuan, down 30% from quarter to quarter, but it is still in line with the company's previous guidelines for maintaining a low double-digit percentage of revenue for the 2025 fiscal year. The bank maintains a capital expenditure forecast of 97 billion yuan and 107 billion yuan respectively for the 2025/2026 fiscal year to continue to support the company's internal business upgrade and growth prospects.