Guosen: Maintaining TENCENT (00700) "outperform market" rating; overseas markets are becoming its clear second growth curve.

Guosen released a research report stating that recently, Tencent (00700) hosted an investor conference, where the management shared the latest developments in overseas cloud, overseas games, and AI empowerment. Tencent's overseas business is accelerating: cloud services cover the world with a "infrastructure first" strategy, and its technological and localization advantages assist Chinese companies in going global and expanding local customers. The overseas market is becoming its clear second growth curve. The rating of "outperform the market" is maintained. Guosen's main points are as follows: Overseas cloud business: Infrastructure first, global infrastructure accelerates expansion, forming a deep-rooted pattern in Asia, strengthening in the Middle East, and radiating in Europe and America. Tencent Cloud adopts the "infrastructure first" strategy in Asia, the Middle East, Europe and America, accelerating the layout of data centers, covering 22 regions globally. Its core advantages lie in its leading technology (such as media cloud, audio and video transmission, Fintech scenes) and deep localization services. By successfully migrating benchmark customers such as GoTo in Indonesia and CP Group in Thailand, it has proven its ability to enter the market with "high cost-effectiveness" and optimized architecture (such as improving response speed and local IDC deployment). Competition overseas is relatively mild, with Tencent focusing on SaaS and PaaS business, with overseas customers mainly including Chinese companies going global and local internet companies. Faced with issues such as chip supply, Tencent prioritizes securing internal model training chip reserves, while using CPU resources to support inference scene demand. In addition, many overseas customers have their own GPU resources, and Tencent helps them better utilize these resources. Overseas gaming business: Industrial capabilities realized, GaaS capabilities empowered. Tencent's overseas game growth is strong in 2025 (up 43% YoY in Q3), with the bank expecting annual revenue to reach 75.7 billion yuan, accounting for 32% of Tencent's gaming revenue, an increase of 3 percentage points. The acceleration is mainly due to 1) Tencent's industrial capabilities have matured in recent years; 2) it takes 4-5 years to see the effects of acquiring overseas games. Tencent's cooperation attitude is open, with an increasing number of teams willing to collaborate, such as Tencent investing in games ranked high on the Steam platform and helping with mobile game development; assisting in optimizing the long-term content planning of acquired studio GGG's "Path of Exile." Tencent is successfully replicating the GaaS model verified in China to global markets by synergizing the industrial efficiency of domestic teams (such as the rapid iteration of "Delta Force") with the creative advantages of overseas teams, leading in market share in Southeast Asia and other regions. AI empowering games: Full chain penetration, from efficiency improvement to experiential innovation. For example, 95% of employees at Photon Studio use AI tools to reshape game production (e.g. 50% improvement in 2D art production efficiency, 8% reduction in single-task 3D modeling costs, etc.). On the experiential end, applications like AI teammates and AI coaches have improved user retention. In terms of AI empowered game technology, over the past year, it has moved beyond pure large language model frameworks, gaining basic "scene coherence" and "real-time generation capabilities," such as demonstrating a demo where the scene dynamically generates behind a player as they run and turn. However, games based on LLM still face issues such as mechanical character behaviors and lack of coherence. With its native gaming genes and large model layout, Tencent has a first-mover advantage in the AI native game field. Investment recommendation: Overseas has become Tencent's clear second growth curve for gaming and cloud services, with initial strategic investments entering the phase of fruition. Maintain profit forecasts, with estimated adjusted net profits of 262.6/301.3/345.4 billion yuan for 2025-2027. Investment risks: Policy risks; risks of a weak macroeconomic environment; intense competition in the advertising industry; risks of new games not being released on schedule; AI ethics risks, etc.