DBS Bank reiterates a "buy" rating on TENCENT (00700) with a target price of 800 Hong Kong dollars.

DBS Bank released its latest research report, stating that the widespread application of AI within Tencent will strongly support the continued growth momentum of its two core business segments online games and online advertising. The bank reiterated its "buy" rating on TENCENT (00700) and raised its target price for the next 12 months from 786 Hong Kong dollars to 800 Hong Kong dollars. The research report analyzed that in the advertising business, Tencent has launched an automated advertising delivery solution called "AIM+." Early data shows that, due to more precise targeting and creative generation, the return on investment (ROI) from this solution is superior to traditional manual delivery methods. In the gaming business sector, DBS Bank believes that AI-driven non-player characters (NPCs), more efficient content creation processes, and precise marketing tools will further deepen user engagement and enhance monetization capabilities. Based on the expected business improvement from AI technology, DBS Bank has raised its adjusted profit forecasts for Tencent for the fiscal years 2025 to 2027 by 4%, 5%, and 8%, respectively. In addition, addressing concerns about computational power in the market, the research report quoted Tencent management stating that, although capital expenditure plans for the fiscal year 2025 have been adjusted due to factors such as chip supply, the company currently has enough chip reserves to meet internal AI application needs, and the long-term revenue growth trajectory driven by AI has not been affected. In terms of valuation, DBS Bank uses the sum-of-the-parts (SOTP) valuation method, giving Tencent's core business a price-to-earnings ratio of 20 times for the fiscal year 2026, plus adding the fair value of its listed investment company to arrive at the target price of 800 Hong Kong dollars. This target price corresponds to a price-to-earnings ratio of 25 times for the fiscal year 2026, slightly higher than its average level of 20 times over the past five years. Risk factors include stricter regulation on game approvals and anti-monopoly measures, irrational competition in the social media sector, and potential AI chip supply shortages due to geopolitical factors.