UBS: Tencent (00700) AI investment paves the way for long-term growth, reiterates "buy" rating.

UBS released a research report stating that they recently met with TENCENT (00700) management to discuss primarily AI development, including agent AI and monetization models. They believe that Tencent is most capable of capturing long-term growth opportunities in this area. Currently, Tencent's forecasted P/E ratio is 14 times, and they believe that its core business strong performance and long-term AI potential are underestimated. They reaffirm Tencent as a key and top pick stock, maintaining a "buy" rating with a target price of 780 Hong Kong dollars. The report quoted management as saying that AI is evolving from communication and reasoning to more action-oriented applications, gradually leveraging Tencent's advantages. Tencent has WeChat and QQ as natural interfaces between humans and AI, cross-platform capabilities, as well as expertise in terminal products and security software. WeChat agent currently faces three bottlenecks: limited model capabilities, data privacy and security concerns, and economic model challenges (high reasoning costs but difficult to monetize subscriptions). The Mixnet 3.0 model is expected to be launched in mid-April and will be the most significant progress in the company's model iteration. Regarding AI monetization, management takes a holistic view, positioning the Mixnet core model as an enabling layer to promote wider ecosystem growth, rather than focusing on direct monetization of the model itself. With expectations of increased user engagement within the ecosystem through WeChat agents, monetization opportunities will be created through payments, transactions (commission from small shops), and advertising revenues. Tencent has already achieved high return on investment in advertising and gaming businesses through AI. In cloud business, Tencent's revenue growth accelerated in the fourth quarter of last year, with adjusted operating profit of 5 billion RMB by 2025 (profit margin around 8% to 10%). With improvements in chip supply (especially in the second half of the year), management plans to gradually shift the business towards external cloud customers. In the gaming business, management believes that AI is an enabler rather than a disruptor. Tencent's game portfolio is mainly focused on multiplayer PvP games, which are more difficult to replace compared to single-player games.