Bank of America Securities: Citing Tencent Holdings, AI business has significant monetization potential compared to peers, reiterates "Buy" rating

According to the Zhitong Finance APP, Bank of America Securities released a research report stating that Tencent Holdings (00700) held an investor meeting to share the progress of its investment in artificial intelligence products. The bank maintains a target price of HKD 631 for Tencent and reiterates a "Buy" rating supported by AI potential.

Tencent's management indicated that several AI products have entered the post-launch phase but will take several quarters to start monetizing. For example: 1) The Yuanbao application has achieved a certain product-market fit and has entered the launch phase; 2) The QQ browser has recently upgraded to a public AI browser; 3) The WeChat AI experience is in the early stages of product-market fit. In the coming quarters, products will begin to monetize one by one. Tencent funds its AI investments through operational leverage from existing businesses. In the short term, cost impacts mainly come from depreciation.

Due to Tencent prioritizing GPU usage for internal needs, profits will manifest in the later stages of the GPU lifecycle. Tencent stated that it can flexibly utilize GPUs, adjusting usage based on internal and external demand as well as high and low demand scenarios, fully leveraging their economic lifecycle. The bank slightly adjusted its profit forecast for Tencent in 2025 by 1%, as it expects the gap between revenue growth and adjusted operating profit growth in the second to fourth quarters to narrow compared to the first quarter.

Tencent indicated that AI improves the gaming experience in multiple ways, particularly for new player onboarding, player guidance, player interaction, anti-cheating measures, and game fairness and balance, all of which help enhance user retention. According to QuestMobile data, the 30-day retention rate of Tencent's major mobile games is on the rise.

In terms of commercial services, Tencent's commercial services department has four structural drivers: 1) Small shop commissions; 2) CRM (Customer Relationship Management) services and WeChat Work software; 3) Security, real-time communication, and database solutions; 4) GPU leasing. Management remains optimistic about the long-term potential of enterprise services in China, but the growth path is not limited to infrastructure services; it also includes software services. On the software level: 1) Competition is less intense, and profit margins are higher; 2) Tencent's products are more competitive. WeChat Work has achieved a good adoption rate among enterprises and can cross-sell Tencent's platform and infrastructure services.

Tencent's management stated that compared to its peers, Tencent's business has significant monetization potential and is gradually enhancing monetization: 1) Increasing advertising revenue through traffic growth, improved ad click-through rates, and regularly increasing ad load; 2) Enhancing game revenue by providing higher-value virtual goods; 3) In fintech, the company is expanding its loan business in a controlled manner.

Regarding the rapid growth of GMV for small shops, there is a gradual deepening of connections with other activities within the WeChat ecosystem. The company team is overcoming bottlenecks one by one, indicating that there are several successful e-commerce templates to draw from, as well as numerous service providers. In terms of monetization potential: In addition to increasing commission rates and more closed-loop transaction advertisements, small shops can also enhance advertising targeting accuracy through SKU (Stock Keeping Unit) level transaction information