Guosen: Maintain TENCENT (00700) "outperform market" rating with overseas cloud and gaming driving growth AI empowering to build new growth engine.

Guosen released a research report stating that it maintains an "outperform the market" rating for TENCENT (00700). Overseas has become the clear second growth curve for Tencent's gaming and cloud businesses, with the early strategic investments entering the phase of realization of results. Tencent Cloud has a global layout of 64 available zones for infrastructure, and in the AI native gaming field, it is expected to continue leading in the transformation of "Generative AI + SaaS" in the future through the fusion of gaming scene understanding and large model technology. Guosen's main points are as follows: Infrastructure foundation + AI empowerment, Tencent seizes the growth highland overseas Layout of overseas cloud business: Infrastructure takes the lead, global infrastructure accelerates expansion, forming a pattern of deep cultivation in Asia, strength in the Middle East, and radiation in Europe and America. Since the beginning of this year, Tencent has increased its investment in overseas cloud infrastructure, planning to invest $150 million in the Middle East and establish the first data center in Saudi Arabia; planning to invest $500 million in Indonesia and build the third data center in Indonesia; and building the third available zone in Osaka, Japan. Currently, Tencent Cloud's infrastructure covers 22 regions on five continents, operates in 64 available zones, and has more than 3,200 global acceleration nodes. Core advantages: Technology + localized service dual-drive, building overseas differentiated competitiveness. At the technical level, Tencent Cloud excels in multiple races such as audio and video, games, and databases. Among them, Tencent's media cloud service leads globally, adapts to trends such as short videos and live streaming, supports core scenarios like live broadcasts of football matches in Thailand, and services such as bandwidth and low latency video transmission are highly recognized in the market. At the scene level, relying on its experience in domestic financial technology and commercial services, Tencent Cloud is able to accurately match the digital needs of FinTech and retail industries in Southeast Asia. In addition, Tencent actively serves overseas customers and helps improve response speed through local IDC construction. For example, the GoTo customer case, besides the price advantage, Tencent's overall solution design is more efficient, such as the speed of local data transactions, with storage in local data centers. Currently, the Indonesian GoTo Group has migrated core businesses such as food delivery and travel from an overseas cloud provider they have cooperated with for ten years to Tencent Cloud, resulting in improved app response speed. Thailand's Charoen Pokphand Group has completed the migration of its supermarkets, department stores, and logistics businesses, significantly improving operational efficiency. Overseas competition is relatively mild, Tencent focuses on SaaS and PaaS businesses, with overseas customers mainly including Chinese companies going global and local internet companies Currently, the Southeast Asian cloud market is still in the stage of migrating to the cloud at the IaaS level. Participants in the overseas cloud market include international leading cloud vendors and domestic peers, with Tencent Cloud taking a "high cost performance" and localized service approach to avoid pure price wars. Faced with issues such as chip supply, Tencent Cloud focuses on PaaS/SaaS services, prioritizing the guarantee of internal model training chip reserves, while using CPU resources to support inference scene demands. In terms of future demand outlook, Tencent will on one hand undertake the incremental demand brought by Chinese companies going global, and on the other hand focus on cultivating the local SaaS market, grasping the trend of "Generative AI + SaaS" transformation. With the further emergence of benchmark customer effects and the continuous deepening of AI scenarios, Tencent Cloud is expected to achieve dual increases in scale and profit in emerging growth markets such as Southeast Asia. According to the 2025 Tencent Global Digital Ecology Conference, Tencent Cloud has become the preferred cloud service provider for over 90% of the overseas internet companies and over 95% of the overseas gaming companies, and has helped customers such as Midea, GAC, POP MART, and Yang Guofu to rapidly deploy infrastructure, compliance systems, and core capabilities overseas. Engineer dividend and GaaS capabilities help accelerate the development of Tencent's overseas games Tencent's game development is speeding up by 2025. According to Tencent's financial report, the international game revenue in Q3 2025 increased by 43% year-on-year to RMB 20.8 billion. The growth is mainly due to the revenue growth of games under Supercell, the revenue contributions from recently acquired game studios, and the sales performance of the new PC and console game "Cyberpunk 2077". We expect Tencent's overseas game revenue to reach RMB 75.7 billion by 2025, a year-on-year increase of 31%, accounting for 32% of Tencent's game revenue, an increase of 3 percentage points. The acceleration is mainly due to Tencent's industrialization capabilities gradually maturing in recent years; It takes 4-5 years for the effects of acquiring overseas games to be seen. Tencent's collaborative attitude is open, and it is observed that more teams are willing to cooperate, for example, Tencent has invested in game studios with a high ranking on the Steam platform to assist in mobile game development and helped optimize long-term content planning for the acquisition of GGG studio in "Path of Exile". Tencent's domestic game team exports engineer dividends and GaaS capabilities, while overseas teams ensure cultural aesthetic adaptation 1) Tencent's domestic team going overseas has a deep understanding of categories through intense market polishing in China. The engineer dividend is significant, with high team efficiency; strong data-driven and online service capabilities. For example, the game "Delta Force" achieved a far higher content production efficiency pace than Western studios through parallel development by a team of thousands and weekly iterations with 7-8 major updates a year. 2) Tencent's overseas acquisition team: Fits the mainstream cultural aesthetics of Europe and America, with unique creativity and design, but lacks engineer resources for continued content production capacity. Overseas teams have sufficient creativity, requiring long-term content support for overseas games. At the same time, Tencent's domestic team provides engineer support and GaaS capabilities output for overseas games. In the future, Tencent will focus on GaaS and IP longevity overseas, increasing the lifecycle value 1) Deepening GaaS operational models: Drawing on the long-term operating experience in China, Tencent provides quarterly updates, social gameplay iterations, and other services for core products such as Ubisoft and "PUBG MOBILE" to extend product lifecycles. 2) Strengthening IP value exploration: Promote cross-media development, build gaming ecosystems, and adapt IPs like "Assassin's Creed" to create globally sustainable brands. 3) Continuously empower the AI full chain: Applying self-developed AI large models to overseas game development to enhance cross-platform adaptation efficiency and content production capabilities while reducing localization development costs. AI empowers various aspects of game production and manufacturing AI's empowerment of games mainly focuses on cost reduction and enhancing the gaming experience. 95% of Tencent's Photon game employees use AI-related tools in their work, covering all aspects of production and manufacturing. Reshaping game production (such as 2D art production, a 50% increase in efficiency; 3D modeling, an 8% decrease in per-task costs, etc.) AI enhancing game experience (AI players, AI coaches helping improve the retention of new players; AIBot creating personalized gaming experiences for thousands of players) AI empowering technical operations (detecting abnormal images, intelligent cheat detection, etc.) AI native games are still in the exploration stage, and the industry turning point needs to observe changes in user retention data for AI native games in the future. Tencent has an advantage in breakthroughs in AI game native scene technology In terms of AI empowerment of game technology, over the past year, it has moved beyond the framework of pure language models and has begun to have basic "scene coherence" and "real-time generation capability", for example, demonstrating a demo that achieves "real-time dynamic generation of scenes behind the player after running and turning around". However, games based on large language models still have issues such as mechanical character behaviors and lack of coherence. AI technology needs to simultaneously have three major capabilities, "memory setting" (to ensure game coherence), "high-speed prediction controller" (real-time scene prediction output every minute), and "real-time dynamic generation" (generating character and object interactions based on player behavior), rather than just simulating scenes. Game native companies (understanding game scenes and coherence requirements) need to optimize technology and resource allocation based on their own game scene experience to push for substantial improvements in games. Looking ahead, Tencent is not only a game native company but also deeply established in the field of large models, able to tailor game-exclusive world models strategically. Investment risks Policy risks; risks of a weak macroeconomic environment; intense competition in the advertising industry; risks of new games not being released on time; AI ethics risks, etc.