Yamato: TENCENT (00700) Game revenue confirmation timing leads to slightly lower first quarter revenue. Target price lowered to 700 Hong Kong dollars. Rating "Buy".

Daiwa released a research report stating that it reiterated a "buy" rating on TENCENT (00700) and lowered the 12-month target price calculated using the sum-of-the-parts (SOTP) method from 710 Hong Kong dollars to 700 Hong Kong dollars, equivalent to an average forecasted price-earnings ratio of 19.3 times for 2026 to 2027. Downside risks include weaker-than-expected game and advertising sales, as well as AI expenses higher than expected. Tencent's first-quarter revenue increased by 9% year-on-year, slightly below market expectations, mainly due to timing differences in game revenue recognition; while non-International Financial Reporting Standards (non-IFRS) adjusted net profit increased by 11% year-on-year, in line with expectations, benefiting from resilient profit margins despite a significant increase in artificial intelligence (AI) expenses. The bank believes that although it is still early to discuss the timetable for AI monetization, Tencent's willingness and ability to invest actively in AI are becoming more positive. Its AI team has been reorganized, the ecosystem roadmap is clearer, and with domestic chip supply improvement, it supports a strategy of "investing ahead and reaping rewards later." The bank pointed out that value-added services (VAS) revenue fell short of expectations mainly due to weak game revenue (revenue). Domestic game revenue increased by 6% year-on-year, but was affected by the later Lunar New Year, resulting in a shorter revenue recognition window; international game revenue increased by 13% year-on-year, slightly below expectations, affected by a high base and normalization of integration benefits. Although social network growth is weak structurally, it is expected that domestic game growth will accelerate from the second quarter of this year, benefiting from deferred revenue recognition driving multi-quarter catch-up. AI investment accelerated in the first quarter of this year, with capital expenditures reaching 31 billion Chinese yuan, an 18% year-on-year increase; research and development expenses reached 23 billion Chinese yuan, a 19% year-on-year increase. The bank expects AI expenses, especially capital expenditures, to increase significantly and be concentrated in the second half of this year. Daiwa slightly lowered earnings forecasts by 2% to 4% for 2026 to 2028 to reflect the expected increase in AI investment.