CICC maintains Tencent (00700) at "Outperform" rating with a target price of 666 Hong Kong dollars.

CICC released a research report stating that it maintains its revenue and Non-IFRS net profit forecast for TENCENT (00700) for 2026 and 2027. It maintains an "outperform industry" rating and a target price of HKD 666, corresponding to a 20x 2026 Non-IFRS P/E, representing a 44% upside potential from the current stock price. The current trading is at 14x/12x 2026e/2027e Non-IFRS P/E. Main points from CICC: 1Q26 Non-IFRS net profit in line with expectations In the first quarter, Tencent's revenue increased by 9% to RMB 196.5 billion, slightly below expectations due to deferred revenue impact; Non-IFRS net profit increased by 11% to RMB 67.9 billion, in line with expectations. Significant revenue growth, evergreen games reach new highs Due to the late Lunar New Year in 2026, some game revenue and revenue sharing were deferred to subsequent quarters (the company expects to adjust the impact of this on 1Q VAS revenue growth to 8%). Game revenue in the first quarter increased by 8%, with domestic game revenue growing by 6%, revenue increasing by more than 10%, "Honor of Kings" revenue reaching a historic high, "Peace Elite" revenue increasing by over 30%, and new game "R.O.C. Kingdom: World" reaching 13 million daily active users in its first month. Taking into account the deferred impact and new game contributions, CICC expects domestic game revenue to increase by 12% in the second quarter; overseas game revenue increased by 13% in the first quarter (14% at a fixed exchange rate), mainly driven by Supercell's games "Clash of Clans" and "Clash Royale" on the PC side. CICC expects overseas game revenue to increase by 10% in the second quarter. Accelerated advertising in 1Q; enterprise services continue momentum Advertising revenue in the first quarter increased by 20%, driven by strong demand from network services and game advertisers, strengthening of the e-commerce ecosystem, growth in video inventory (total length increased by over 20%), and accelerated commercialization of WeChat search. The intelligent delivery system AIM+ continues to upgrade (empowering about 30% of advertisers), and CICC expects advertising revenue to increase by 17% in the second quarter. Financial services revenue in the first quarter increased by 7%, better than expected, due to improvements in commercial payment volume and price, as well as steady growth in wealth management; enterprise services revenue increased by 20%, driven by the simultaneous growth in cloud service volume and price, rapid expansion of international cloud business (40% growth), and an increase in technology service fees driven by a high increase in transaction volume from WeChat Mini Program stores. CICC predicts a 25% increase in enterprise services revenue in the second quarter, with financial and enterprise services revenue increasing by 10%. Main business profits steadily released, AI investment actively controlled At the end of April, Tencent released Hy3 preview LLM, which balances practicality and cost-effectiveness and has been deployed in 131 internal products for collaborative iterations, moving towards larger parameter models. Management believes that WeChat/QQ/WeChat Work are natural control interfaces for Agentic AI, and in the future, if the code of mini programs is transformed into AI Skills, it is expected to build differentiated ecological barriers. According to the announcement, excluding the impact of new AI products, Non-IFRS operating profit increased by 17% in the first quarter, indicating stable profitability of core business and sufficient cash flow support for AI investment. CICC expects adjusted operating profit and adjusted net profit to increase by 7% and 9%, respectively, in the second quarter. Risk Warning: Macro-economic uncertainty; regulatory risks; higher than expected costs or expense ratios.