UBS: Lowers TENCENT (00700) target price to HK$740, reiterates "Buy" rating.

UBS released a research report lowering TENCENT (00700) target price by 3.9%, from HK$770 to HK$740, reiterating a "Buy" rating. The bank expects Tencent's third-quarter revenue to increase 7%, slower than the second quarter's growth, with adjusted net profit declining 7% year-on-year to RMB 65 billion (up 9% in the second quarter), mainly dragged by AI investments and the potentially lower share of profit from associates. The bank's segment forecasts: In gaming, domestic market growth is expected to slow to 12% in the third quarter due to a high base (17% growth in the second quarter); international market is forecast to decline 3% due to weak Supercell performance and a limited number of new game launches in the third quarter. Advertising is expected to grow 18% quarter-on-quarter, with growth slowing due to persistent macroeconomic headwinds, as gains from ad tech upgrades, increased ad load on Video Accounts, and higher eCPM ad formats (such as incentivized ads and closed-loop ads) are suppressed. Fintech is expected to remain broadly stable, up 8% year-on-year, with weak payment growth, but cloud growth slightly accelerating as chip supply improves and WorkBuddy subscription revenue increases. On margins, the bank notes that gross margin is expected at 57.2%, up 0.8 percentage points year-on-year, benefiting from a business mix shift toward higher-margin businesses. Due to increased depreciation and AI operating expenses (UBS estimates RMB 16 billion), adjusted operating profit is forecast to decline 2% year-on-year to RMB 71 billion. Excluding AI investments, Tencent should continue to maintain operating leverage, with adjusted operating profit growth estimated at 13% (19% in the second quarter).