Haitong International: Lowering the target price of Tencent Holdings (00700) to HK$480. Performance is roughly in line with expectations

The Zhitong Finance App learned that Haitong International released a research report stating that Tencent Holdings (00700) 2026/2027 earnings forecast per share will be lowered by 3%/10% to reflect the current burden of forward-looking AI investments, and the target price will be lowered by 9% from HK$525 to HK$480. Tencent's long-term outlook remains positive, and the rating of “outperforming the market” was reiterated.

Tencent's revenue for the second quarter of 2026 was RMB 204.8 billion, up 11% year over year, which is generally in line with market expectations. Gross profit of RMB 118.4 billion, gross profit margin of 57.8%, better than expected 2%; adjusted operating profit of RMB 75.6 billion, operating margin of 36.9%, adjusted net profit of RMB 68.4 billion, net profit margin of 33.4%, both of which were broadly in line with expectations.

According to the report, Tencent's free cash flow turned negative in the second quarter due to accelerated investment in AI. Although AI investment is expected to rise, the bank is still surprised by the annual rate of operation of capital expenditure (about 220 billion yuan annualized). Although it is difficult to specifically quantify the impact of rising capital expenditure, the bank drew inspiration from considering profit differences before and after investing in AI. It is estimated that AI investment in 2026 will have an impact of nearly RMB 50 billion through sales costs and operating expenses. Due to the different characteristics of the core business and the AI business, the bank switched from a price-earnings ratio method to a segmented summation method to better reflect the core business value and the potential value of AI.