Haitong International: Downgrades Tencent's target price to HKD 480, still maintaining a positive outlook for the long-term.

Haitong International published a report indicating that Tencent's revenue for the second quarter was 204.8 billion yuan, a year-on-year increase of 11%, roughly in line with market expectations; gross profit was 118.4 billion yuan, with a gross margin of 57.8%, exceeding expectations by 2%; adjusted operating profit was 75.6 billion yuan, with an operating margin of 36.9%, and adjusted net profit was 68.4 billion yuan, with a net margin of 33.4%, both being roughly in line with expectations. Due to increased investment in AI, Tencents free cash flow turned negative in the second quarter. Although AI investments are expected to rise, the annualized run rate of capital expenditures still surprised the firm. Given the different nature of the core business and AI operations, the firm switched from a price-to-earnings method to a sum-of-the-parts approach to better reflect the value of the core business and the potential value of AI. The earnings per share forecast for 2026/2027 has been cut by 3%/10% to reflect the current burden of forward-looking AI investments, and the target price has been lowered from HKD 525 to HKD 480, maintaining a positive outlook for Tencents long-term prospects and reiterating the "Outperform" rating.