CMSC: Raises TENCENT (00700) target price to 700 Hong Kong dollars, maintains "buy" rating.

CMSC released a research report stating that the current valuation of TENCENT(00700) is 18 times/16 times P/E ratio for the fiscal year 2025/2026, which is at historical average level compared to 17 times/15 times for Chinese peers and 25 times/23 times for US peers. With its strong social networking moat and AI technology, it is expected that AI agents, advertising, commercialization of AI products, and profit margin expansion driven by AI will bring potential earnings and valuation growth opportunities for Tencent. The rating of "hold" is maintained, with optimism for the company's unique market position, and the target price is raised from 670 Hong Kong dollars to 700 Hong Kong dollars. The firm pointed out that Tencent's performance in the second quarter exceeded expectations, with revenue growth of 15% year-on-year, exceeding expectations by 3%; non-IFRS net profit grew by 10% year-on-year, also exceeding expectations by 3%, mainly benefiting from the improvement in profit margins of various business segments. All business lines show strong growth momentum under the empowerment of AI, leading to an upward adjustment of profit forecasts for the fiscal year 2025/2026. The report mentioned that due to the impact of chip supply constraints, Tencent's capital expenditure in the second quarter was 19.1 billion yuan, a 30% decrease from the previous quarter, but it still complies with the company's previous guidance of maintaining capital expenditure intensity for the fiscal year 2025 at a low double-digit percentage of income. The firm maintains forecasts for capital expenditure of 97 billion yuan and 107 billion yuan for fiscal years 2025/2026, respectively, to continue supporting internal business upgrades and growth prospects.