Lyon: Maintaining Tencent (00700) "highly confident in outperforming the market" rating AI investment may drag down profit margin.

Lyon released a research report stating that it is expected that TENCENT (00700) will continue to achieve steady revenue growth, but investments in artificial intelligence may drag down profit margins in 2026. The bank estimates that Tencent's total first-quarter revenue will increase by 11% year-on-year to 200 billion RMB, with adjusted EBIT increasing by 10% year-on-year to 76 billion RMB. Online game revenue is expected to increase by 12.9% year-on-year during the period, benefiting from strong performances of games such as "Honor of Kings", "Peacekeeper Elite", and "Delta Force"; advertising revenue is rebounding by approximately 20% year-on-year; and growth in financial technology and enterprise services is accelerating. The bank maintains a "highly confident outperforming the market" rating on Tencent with a target price of 740 Hong Kong dollars. The bank believes that Tencent, with its vast WeChat ecosystem, is in a favorable position to monetize artificial intelligence applications, making its profitability more resilient than its peers. The preview version of HyJin 3.0 was open-sourced in April, with a 40% increase in reasoning efficiency compared to HyJin 2.0, and input and output costs reduced by more than 50%. The introduction of new models and agent-based applications will help Tencent's stock price to be reevaluated.