CICC: Maintains Tencent's Outperform Rating and Raises Target Price to HKD 700

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that based on the rapid growth of Tencent Holdings (00700) in various businesses, it has raised its revenue forecasts for 2025/2026 by 2%/4% to RMB 745.3 billion / 815.8 billion, while maintaining its Non-IFRS net profit forecasts for 2025/2026. The rating is maintained at "outperform the industry," and due to the upward shift in market valuation, the target price has been raised by 17% to HKD 700. Based on the longer-term empowerment prospects of AI, the valuation has been switched to 2026, corresponding to a 20x Non-IFRS P/E for 2026, with a 19% upside potential, currently trading at a 17x Non-IFRS P/E for 2026.

CICC's main points are as follows:

Revenue in Q2 2025 exceeded expectations, Non-IFRS net profit was basically in line with expectations

Tencent's revenue in Q2 2025 increased by 14.5% year-on-year to RMB 184.5 billion, exceeding the firm's expectations by 3.5% and market expectations by 3.1%, mainly due to better-than-expected revenue from gaming, advertising, and FBS businesses; Non-IFRS net profit increased by 10% year-on-year to RMB 63.05 billion, basically in line with the firm's expectations and exceeding market expectations by 1.6%.

AI empowers various businesses comprehensively

In terms of advertising, the company's advertising revenue in Q2 2025 increased by 20% year-on-year to RMB 35.8 billion, exceeding the firm's and consensus expectations by 2%. AI has been further applied in advertising creation, placement, recommendation, and performance analysis, enhancing CTR, CVR, and merchant ROI. The company stated that it benefited from improvements in the AI-driven advertising platform, which boosted demand for ads on video accounts, mini-programs, and WeChat search. Among them, video account and mini-program advertising revenue increased by 50% year-on-year, and search advertising increased by 60%. The firm expects advertising revenue to grow by 18.6% in Q3 2025. In terms of cloud computing, the firm estimates that enterprise service revenue in Q2 2025 increased by 19%. Apart from the contribution from video account e-commerce technology service fees, AI demand is driving cloud business, with enterprise customers accelerating cloud revenue growth year-on-year based on GPU leasing and API token usage. In the gaming sector, AI is reconstructing Tencent's PvP/PvE gaming ecosystem—accelerating content production through AI, creating more realistic NPC interactions, and optimizing marketing strategies for user acquisition and retention.

Game revenue performance can break the concern of "high base" growth, financial business growth exceeds expectations

The company's game revenue in Q2 2025 increased by 22% year-on-year to RMB 59.2 billion, exceeding the firm's and consensus expectations by 5%. Overseas game revenue increased by 35%, mainly benefiting from strong performances of games under Supercell and titles like "PUBG M." "Clash Royale" achieved a new high in revenue in June, the highest in seven years; domestic game revenue increased by 17%, with the popular "Search and Strike" game "Delta Force" reaching over 20 million daily active users (July 2025). Looking ahead, the firm believes that the company's game revenue can still maintain rapid year-on-year growth in the second half of 2025—on one hand, relying on "Delta Force" and the continuous vitality of evergreen games both overseas and domestically; on the other hand, some new game inventories are about to be launched, with the domestic version of "Valorant Mobile" scheduled to go live on August 19, with over 60 million reservations across the internet In addition, the revenue from financial and corporate services in 2Q25 increased by 10% year-on-year to 55.5 billion yuan, of which the bank estimates that fintech revenue grew by 8% year-on-year (the commercial payment revenue in 2Q25 turned positive year-on-year, but the growth rate relies more on loans and wealth management services and other derivative services), with payment amounts returning to growth and derivative businesses growing rapidly.

Gross margin continues to improve

In 2Q25, the company's gross margin increased by 3.6 percentage points year-on-year, with VAS, advertising, and FBS business gross margins increasing by 3.4 percentage points, 2 percentage points, and 4.5 percentage points, respectively. Due to the overall good performance of the gross margin and effective cost control, the Non-IFRS operating profit in 2Q25 increased by 18.5% year-on-year, and the Non-IFRS net profit increased by 10% year-on-year (the growth rate is lower than OP, mainly due to the underperformance of joint venture company earnings). In addition, the company's capital expenditure in 2Q25 was 19.1 billion yuan; it repurchased 19.4 billion Hong Kong dollars (46% of the annual repurchase plan has been completed in 1H25).

Risk warning: Regulatory risks; new game launches not meeting expectations; costs or expense ratios higher than expected