Tianfeng: Maintain a "buy" rating on TENCENT (00700) with a target price of 476 Hong Kong dollars.

Tianfeng released a research report stating that they maintain a "buy" rating for TENCENT (00700) with a target price of HK$476. The company's AI business is accelerating, and the trend of industry interconnection is clear, with potential for more growth points in the medium to long term. In the short term, the bank expects the company's game revenue growth rate to increase sequentially in the second half of the year, with a focus on the operational pace of "Dungeon & Fighter: Origin." Tianfeng's main points are as follows: The new generation "Tencent Hybrid Turbo" model's Chinese capability is benchmarked against GPT-4o, the 2BAI product system is comprehensive, and the 2CAI products are being upgraded at a faster pace. On September 5th, Tencent launched the new generation large model "Tencent Hybrid Turbo," which achieved better results through its self-developed trillion-level inter-layer heterogeneous MoE structure. Compared to the previous model, the performance of Tencent Hybrid Turbo has significantly improved, with training efficiency up by 108%, inference efficiency up by 100%, inference cost reduced by 50%, and performance benchmarked against GPT-4o in multiple benchmark tests. In the Chinese large model evaluation benchmark SuperCLUE's "Chinese Large Model Benchmark Evaluation August 2024 Report," Tencent Hybrid Turbo ranked top among domestic large models. Currently, Tencent Hybrid Turbo is online on Tencent Cloud, with input and output prices only half of the previous model. Enterprises and developers can use the capabilities of Tencent Hybrid Turbo large model through APIs, dedicated models, fine-tuned models, etc. In addition, Tencent also launched the AIinfra brand "Tencent Cloud Zhisuan." Tencent Cloud Zhisuan integrates Tencent Cloud's high-performance computing HCC, high-performance network IHN Xingmai, high-performance cloud storage, acceleration framework, containers, vector database, Zhisuan suite, and other Tencent Cloud products. The vice president of Tencent Cloud stated that Tencent Cloud Zhisuan currently serves 90% of large model manufacturers in China and also helps a large number of IDC (data center) manufacturers transform into AIDC (Zhuan Center) manufacturers. Tencent's current large model product matrix includes basic infrastructure (such as high-performance computing HCC, high-performance network Xingmai, high-performance cloud storage, acceleration framework, Zhisuan suite, etc.), the middle Tencent Cloud TI platform (providing Tencent Hybrid large models, Tencent Cloud industry large models, mainstream open source models for choice), upper platform tools (image creation engine, knowledge engine, video creation engine, Tencent element) and various intelligent applications (intelligent customer service, knowledge management, intelligent marketing, content creation, R&D efficiency improvement, office collaboration, data analysis, risk control, etc.). In September last year, Tencent launched the "Tencent Hybrid Assistant" mini-program, and in May this year, it launched the Yuanbao APP and the intelligent body development platform Yuanqi. According to an interview with Liu Yuhong, the person in charge of Tencent's Hybrid large model, published by "Geek Park" on July 3rd, up to now, nearly 700 business units within Tencent have accessed the Hybrid, with nearly 300 million internal calls, of which about 70% are directly calling the API, and about 30% are jointly fine-tuned by the Hybrid team and business units. The bank is optimistic about the company's advantages in entry, scenarios, data, etc., providing solid support for the long-term development of AI business. This year, Tencent's AI business B-end and C-end products have been making continuous progress. The bank believes that Tencent's large model basic capabilities and applications are in a state of accelerating. Taobao integrates WeChat Pay, focusing on the cooperation strategies of both platforms for non-closed-loop transactions On September 4th, Taobao announced its plan to enhance the consumer shopping experience by adding WeChat Pay capabilities. On the same day, according to the First Financial, Meituan Takeout and Meituan Hotel officially joined Alipay's mini-program, and Meituan Group Buying may be launched in the near future. We expect that the interoperability of Taobao and WeChat Pay may have the following potential impacts on Tencent: 1) it may help increase WeChat Pay transaction fee income; 2) it may help Taobao platform and its merchants strengthen cooperation with Tencent's advertising platform; 3) it may help Taobao merchants operate private domain operations through WeChat. Continuously monitor the pace of promotion of WeChat Pay marketing tools in Taobao, as well as the cooperation strategies of the two platforms for non-closed-loop transactions. "Delta Force" is about to be launched, continuing to focus on the operation pace of "Dungeon & Fighter: Origin" As long-term products recover growth and the contribution income from "Dungeon & Fighter: Origin" is gradually confirmed, the bank expects the company's game revenue growth rate to continue to increase quarter by quarter in the second half of the year. At the marginal level, since the launch of "Dungeon & Fighter: Origin" on May 21st, the IOS game has been among the top in the best-selling list for most of the time. Since September 10th, the game's ranking has slightly declined, possibly related to the update pace of the game's "long grass period." Considering that the Korean version of "DNF Mobile" is expected to be launched ahead of schedule in 2022, the bank believes that the domestic version probably has abundant reserves of game content update resources, and suggests continued focus on the subsequent operation pace. In addition, the company's new game "Delta Force" will be launched on all platforms on September 26th, which may further enhance its market position in the shooting game category.