Tencent (00700)2026 Q1 performance outlook: Mixed openness catalyzes AI commercialization, game advertising growth remains strong.

Tencent (00700) will announce its first-quarter performance ending March 2026 on Wednesday (May 13). Benefiting from the increase in video ads on Video Number, efficiency improvements brought by continuous AI optimization, and growth in cloud business, the above positive factors have largely offset the lack of major new game releases, some AI-related investments, and the impact of slowing growth in the game business due to a high base. Market consensus forecasts show that first-quarter revenue is expected to be approximately RMB 199.53 billion, a year-on-year increase of 10.8%; adjusted net profit is expected to be approximately RMB 67.66 billion, a year-on-year increase of 10.3%. Overall, Tencent's first-quarter report for 2026 is likely to show a characteristic of "steady growth combined with AI acceleration." While maintaining the competitiveness of core businesses such as gaming and advertising, its AI strategy is gradually moving from an investment period to a period of commercial harvest. However, there are still doubts in the market about three major issues: how strong is the intensity of capital expenditure; whether such a large investment can produce top-notch models; and how much actual profit subsequent capital expenditure can bring these are the core focus of the current capital market and are also areas that investors need to pay close attention to. AI strategy: HY3 Preview of Hunyuan opensource Agent's capabilities become the key to valuation winner or loser On April 23, Tencent released and open sourced the Hunyuan HY3 Preview model. Led by Yao Shunyu, this model is the first version after the Hunyuan team's architectural adjustment. It uses a MoE architecture language model with a total of 295 billion parameters, 21 billion active parameters, and a context length of 256K. The initially released model is relatively small in size, emphasizing practicality and cost-effectiveness, while significantly enhancing Agent capabilities. The new generation model has improved capabilities in areas such as chatting, coding, intelligent agents, mathematical reasoning, instruction following, and context understanding. Looking ahead, Guolian Minsheng's overseas team expects that the officially released large-parameter model of HY3 will be released later, and WeChat's cooperation around Agent functionality is expected to deepen. Considering Tencent's strong advantages in entry points, scenarios, social relationship chains, information/content ecosystems, and mini-program infrastructure, from the perspective of current market valuation, whether Tencent has the potential in the Agent field and whether it can develop excellent large models will be the key factors in determining its valuation level. Lyon believes that Tencent, relying on its huge WeChat ecosystem, is in a favorable position in monetizing AI applications, and its profitability will be more resilient compared to its peers. The Hunyuan 3.0 preview version has been open sourced in April, with a 40% improvement in inferencing efficiency compared to Hunyuan 2.0, and input and output costs reduced by over 50%. The new models and agent applications will help drive Tencent's stock price reevaluation. Lyon maintains a "highly convinced outperform market" rating on Tencent with a target price of HKD 740. Nomura believes that Tencent's self-developed model "Hunyuan (HYV)" is currently lagging behind ByteDance's "DouBao" and Alibaba's "Tongyi Qianwen," mainly due to relatively inadequate investment before 2025. In the second half of 2025, Tencent adjusted its AI strategy, and the new team is led by former core members recruited from OpenAI, and the Hunyuan 3.0 was released in April 2026. Due to the significant increase in AI talent and infrastructure strategic investment starting from 2026, Tencent's operating profit margin (OPM) for the first quarter is expected to decline slightly by 0.5 percentage points to 38%. Value-Added Services: Gaming business sees steady growth, Evergreen and new games continue to perform strongly According to forecasts from several brokerages, Tencent's gaming business is expected to achieve steady growth in the first quarter of 2026. It is widely expected that, benefiting from the strong performance of evergreen and new games such as "King of Glory," "Peace Elite," and "Delta Force," the overall revenue growth rate of online games is expected to be between 10% and 14%. Lyon published a research report, expecting Tencent's online gaming revenue to grow by 12.9% year-on-year during the reporting period, mainly driven by the strong performance of games like "King of Glory," "Peace Elite," and "Delta Force." Morgan Stanley expects Tencent's value-added services (VAS) revenue to grow by 6.9% year-on-year in the first quarter of 2026, with online game revenue growing by 10%. Domestic and international game revenues are expected to grow by 8% and 15%, respectively. The slowdown in growth is mainly due to a high base, a later lunar New Year, and a reduction in deferred cycle effects from overseas studio acquisitions and Supercell. Citi's research report points out that Tencent will release its financial performance for the first quarter of the 2026 fiscal year on May 13. The bank predicts that Tencent's first-quarter gaming and advertising business will be stable, with total revenue expected to increase by 9.9% year-on-year to RMB 197.9 billion; non-GAAP net profit is expected to increase by 9.7% year-on-year to RMB 67.2 billion, which is roughly in line with market expectations. Driven by seasonal factors and stable performance of evergreen games, overall online gaming revenue is expected to increase by 11.7% year-on-year to RMB 66.4 billion; domestic and international game revenues are expected to increase by 10% and 16% respectively. Guosen's research report predicts that online gaming revenue is expected to reach RMB 67.9 billion, a 14% year-on-year increase. Domestic game revenue is expected to grow by 13%, with "Delta Force" and the newly launched "Rock Kingdom" performing well; overseas game revenue is expected to grow by 16%. Online Advertising: Video Number and AI empower advertising revenue growth According to views from several brokerages, Tencent's online advertising business is expected to achieve rapid growth in the first quarter of 2026. It is widely expected that, benefiting from incentivized ads on Video Number, cooperation with platform e-commerce, and the continued penetration of AI-enabled intelligent delivery products (such as automatic targeting, automatic bidding, and automatic delivery), the growth rate of advertising revenue is expected to be between 18% and 20%, with an accelerated growth rate. In addition, Tencent's officially launched knowledge skill and AIM+ products are expected to further drive advertising revenue growth. Guolian Minsheng's overseas team believes that the penetration rate of the company's intelligent delivery products is still relatively low, and in the future, through automatic targeting, automatic bidding, and automatic delivery, advertising owners can optimize material generation and improve marketing ROI. It is expected that AI empowerment will significantly extend the growth cycle of the advertising business, and the center of advertising growth is expected to rise. From a technical perspective, Huan Yuan Media's Internet team points out that Tencent's advertising has launched the official knowledge skill "tencent-ads-assistant" and officially launched ClawHub, which is an official AI knowledge base dynamically updated by Tencent's advertising. With the launch of AIM+ products, its penetration rate is expected to continue to increase, thereby driving advertising revenue growth. Guosen's research report states that first-quarter marketing services (online advertising) revenue is expected to be RMB 37.6 billion, an 18% year-on-year increase, with an accelerated growth rate, mainly driven by incentivized ads on Video Number and cooperation with platform e-commerce. Financial technology and enterprise services revenue are expected to be RMB 60.4 billion, a 10% year-on-year increase, with payment business related to macro-consumption; at the same time, the company's product matrix and ecosystem integration in the Open Claw field are leading domestically. Lyon expects that Tencent's advertising revenue will rebound to around 20% year-on-year growth in the reporting period, and financial technology and enterprise services growth will also accelerate.