Zhongshan Securities International: Optimistic about Tencent's AI products and ecological moat, target price lowered to HKD 620.

According to a research report released by China Merchants Securities International, Tencent's second-quarter performance slightly exceeded expectations, with domestic gaming and advertising businesses growing beyond forecasts. Excluding investments in new AI products, operating profit grew by 19% year-on-year, and the profitability quality of its core business continues to improve. On the other hand, Tencent has clarified its four major AI strategies to support more aggressive capital expenditures. The report indicates that AI-driven profitability in core businesses provides backing for AI investments, maintaining a "Buy" rating, with the target price adjusted from HKD 632 to HKD 620. The firm also raised its capital expenditure forecasts for Tencent for 2026 and 2027 to HKD 215.7 billion and HKD 260 billion, respectively, but lowered the company's core net profit estimates for 2026 to 2028 by 5% to 9% due to rising depreciation costs, anticipating core net profit growth rates of 2% and 3% for 2026 and 2027, respectively. The firm believes that the increase in capital expenditure will bring certain financial pressure to Tencent in the short term, but it may be alleviated by improvements in core business profitability, and AI investments have clear downward protection.