CICC: Maintains Tencent Holdings "Outperform Industry" Rating with a Target Price of HKD 600
CICC maintains Tencent's "Outperform" rating with a target price of HKD 600, expecting revenue and profit forecasts for 2025/2026 to remain unchanged. The firm believes Tencent's gaming business is healthy, and the advertising business has robust drivers, leading to sustained overall high-quality growth. It is expected that domestic game revenue will grow by 16% year-on-year in the second quarter of 2025, while overseas game revenue will also increase by 16% year-on-year. Despite facing high base issues in the second half of the year, Tencent's evergreen games and new game performances are still expected to contribute stable revenue
According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that it basically maintains its revenue and profit forecasts for Tencent Holdings (00700) for 2025/2026. It maintains an "outperform industry" rating and a target price of HKD 600, corresponding to 20x/18x 2025e/2026e Non-IFRS P/E, which has a 21% upside potential compared to the current stock price. Currently, it is trading at 17x/15x 2025e/2026e Non-IFRS P/E. The firm believes that the company's gaming business remains relatively healthy, while the advertising business shows robust driving force, and overall high-quality growth continues.
CICC's main points are as follows:
The firm expects the gaming business to maintain healthy year-on-year growth in 2Q25
In terms of domestic gaming, the firm believes that the year-on-year growth rate of domestic gaming revenue in 2Q25 may slow compared to 1Q25—mainly due to: 1) the strong performance of old games like "Honor of Kings" and "Peacekeeper Elite" in 2Q last year raised the base; 2) the launch of "DNFM" in May last year significantly exceeded market expectations. However, in absolute terms, the firm expects domestic gaming revenue in 2Q25 to grow by 16% year-on-year, which remains healthy, mainly considering that the vitality of evergreen old games like "Honor of Kings" and "Peacekeeper Elite" should not be underestimated, as "Peacekeeper Elite" introduced a subway escape mode (search and fight gameplay) with a peak daily active user count of 37 million on May 1; at the same time, new games like "Delta Force" are performing well and can still contribute incremental growth. In terms of overseas gaming, due to the high-quality games from subsidiaries like Supercell having good revenue monetization and a longer revenue amortization cycle, the firm expects Tencent's overseas gaming revenue in 2Q25 to continue benefiting from a 16% year-on-year increase. Looking ahead to the second half of the year, Tencent's gaming business does face the issue of a high growth base, but the firm believes there is no need for excessive concern. On one hand, the excellent performance of Tencent's evergreen games and new games can still contribute a solid foundation; on the other hand, if Tencent's pipeline of games like "Valorant Mobile" and "Honor of Kings World" can be launched as scheduled, it may contribute new incremental space for its gaming revenue.
Strong growth in advertising business
In terms of advertising business, new additions like video accounts and WeChat search, along with AI advertising efficiency improvements, are continuously contributing to the growth of advertising revenue and gross margin. The firm expects advertising revenue to grow by 17% year-on-year in 2Q25. In terms of financial services, the firm believes that commercial payments have seen a narrowing decline after April, but the overall situation in 2Q25 is similar to that in 1Q25; in terms of enterprise services, the slight incremental demand for cloud computing brought by AI, combined with the growth of WeChat e-commerce technical service fees, may maintain double-digit year-on-year growth in enterprise service revenue. Combining both businesses, the firm expects financial and enterprise service revenue to grow by 5% year-on-year in 2Q25.
AI investment accompanies high-quality growth
The firm believes that, on one hand, since previous AI investments have not yet reached the commercialization monetization cycle, the depreciation expenses caused by capital expenditures may further raise costs and expenses; on the other hand, Tencent continues to rely on high-quality growth to achieve gross margin improvement brought about by changes in revenue structure while maintaining relatively cautious expense spending. Considering all these factors, the firm expects the company to still show profit growth > revenue growth for the entire year The bank expects a 14% year-on-year increase in adjusted operating profit and an 11% year-on-year increase in adjusted net profit for Q2 2025.
Risk Warning: Macroeconomic uncertainty; U.S. regulatory factors; costs or expense ratios higher than expected
