Dahua Jixian: Raises target price for TENCENT (00700) to HK$680, reiterates "Buy" rating.

Dahua Jixian released a research report stating that the target price of TENCENT (00700) has been raised from 670 Hong Kong dollars to 680 Hong Kong dollars, reaffirming a "buy" rating. The official launch of Tencent's Hy3 marks a significant progress in its basic model capabilities, thanks to stronger benchmark testing performance, coding and intelligence agent upgrades, and competitive pricing. The widespread deployment in Tencent's ecosystem helps to obtain real-world usage feedback and accelerate model iteration. The initial positive momentum, including a 20-fold increase in tokens and a 6-fold increase in users voluntarily choosing Hy3, shows that user acceptance is increasing, and there is stronger relevance in AI applications focused on enterprise productivity and workflow. Dahua Jixian predicts that Tencent's revenue for the second quarter of 2026 will increase by 11.8% year-on-year to 206.2 billion yuan, and non-GAAP net profit will increase by 10.8% year-on-year to 69.9 billion yuan, with a net profit margin of 33.9%. By business segment, the bank expects online game revenue to grow by 13.7% year-on-year to 67.3 billion yuan, driven by an 11.7% increase in domestic game revenue and an 18% increase in international game revenue. Advertising revenue is expected to increase by 18.8% year-on-year to 42.5 billion yuan, while Financial Technology and Business Services (FBS) revenue is forecasted to increase by 9.3% year-on-year to 62.7 billion yuan, supported by a 22.0% increase in cloud revenue and a 7.0% increase in financial technology revenue. The bank predicts that gross profit and operating profit will increase by 11.3% and 15.5% year-on-year, reaching 116.9 billion and 69.4 billion yuan. Overall, the bank expects the performance in the second quarter of 2026 to be in line with expectations, with the potential upside of online games partially offset by the slowdown in FBS growth. Dahua Jixian stated that Hy3 significantly improves the reliability of AI intelligent agents. The most significant breakthrough is that Hy3 can go beyond simple question and answer tasks and complete complex multi-step tasks. The intelligent agent capabilities of Hy3 can now handle multi-step tasks, directly generating PPT, Word, Excel, PDF, and HTML files based on natural language prompts in the tokens. Its hallucination rate has decreased from 12.5% to 5.4%, making the output results more reliable for enterprise use. Furthermore, enhanced coding and intelligent agent capabilities have improved performance in complex workflows, including software development, financial modeling, and front-end design. The bank believes that this is Tencent strengthening its competitive edge in basic models and showing early signs of narrowing the gap with leading-edge models.