China Merchants Securities International: Target Price Reduced to HK$620 for the “Increase” Rating for Tencent Holdings (00700)

The Zhitong Finance App learned that China Merchants Securities International released a research report saying that the second-quarter results of Tencent Holdings (00700) slightly exceeded expectations, and the domestic game and advertising business growth exceeded expectations. After excluding investment in new AI products, operating profit increased 19% year on year, and the profit quality of the core business is still improving. On the other hand, Tencent has identified four major AI strategies to support more aggressive capital spending. The bank pointed out that the profit release of AI empowers core businesses to support AI investment. It is optimistic about Tencent's AI products and ecological moat, and continues its “increase” rating. The target price was lowered from HK$632 to HK$620.

The bank raised Tencent's capital expenditure forecast for 2026 and 27 to RMB 215.7 billion and lowered the company's core net profit by 5 to 9% for 2026 to 28 due to rising depreciation expenses. It is expected that the core net profit growth rates for 2026 and 27 will be 2% and 3%, respectively. The bank believes that the increase in capital expenditure will put some financial pressure on Tencent in the short term, but it can be mitigated by increasing profits in core businesses, and AI investment has clear downside protection.