What is the biggest highlight of Tencent's second-quarter report? Goldman Sachs: The empowering potential of AI and the growth space for advertising

Tencent's second-quarter performance was strong, achieving the fastest revenue growth in four years and a record gross margin. Goldman Sachs believes this further confirms that Tencent is one of the Chinese internet companies that can benefit the most from AI applications.

On August 14, according to news from the Chasing Wind Trading Desk, Goldman Sachs published a research report interpreting Tencent's second-quarter performance, pointing out that Tencent's AI empowerment and advertising growth led to a strong recovery in performance. Goldman Sachs highlighted the following points from Tencent's financial report:

• AI is no longer a concept but a growth engine: AI technology has significantly improved the conversion efficiency of advertisements and the development and operation efficiency of games, directly driving these two high-quality revenue segments to achieve over 20% year-on-year growth for two consecutive quarters.
• Huge growth potential in advertising business: Tencent's advertising business, especially in video accounts, has an advertising loading rate far below its peers, indicating a growth runway lasting several years. Goldman Sachs expects its advertising revenue for the fiscal years 2025 and 2026 to grow by 19% and 16%, respectively.
• Increased certainty in gaming business: With a "platformization" gaming strategy and heavyweight new products such as "Delta Force" and the mobile version of "Valorant," Tencent's gaming business has reduced volatility and a more stable growth outlook.

The research report analyzes that AI technology is fully empowering Tencent's various business lines, including gaming, advertising, fintech, cloud services, and e-commerce. Among them, the two high-quality revenue sources of gaming and marketing services have maintained over 20% year-on-year growth for two consecutive quarters.

Based on this, Goldman Sachs has raised its revenue and earnings per share forecasts for Tencent for 2025-2027 by 1-6%, and increased the target price from HKD 658 to HKD 701.

AI Technology Fully Empowers Accelerated Business Growth

Goldman Sachs pointed out that AI technology has become the core driving force behind the accelerated growth of Tencent's various business lines. Specifically:

• Advertising business: The advertising business has achieved over 20% year-on-year growth for two consecutive quarters. This is mainly due to the upgrade of AI-driven advertising foundational models, significantly improving click-through rates and conversion rates. Among them, the year-on-year growth rates of advertising revenue from video accounts, mini-programs, and WeChat search reached 50%, 50%, and 60%, respectively.
• Gaming business: In the second quarter, gaming revenue grew by 22% year-on-year, and the gross margin of value-added services (VAS) reached a historic high. AI played a key role in this, including generating more realistic NPCs (non-player characters) and virtual teammates, accelerating content production, and enhancing marketing efficiency for player acquisition.
• Cloud business: The enterprise services segment achieved high double-digit growth, with AI-related GPU leasing and API Token sales becoming key drivers.

Goldman Sachs noted that despite facing chip supply constraints, Tencent's actual capital expenditure performance still exceeded expectations.

Given that artificial intelligence is the key point for empowering/accelerating Tencent's core business growth, Goldman Sachs analysts have raised Tencent's capital expenditure for the fiscal year 2025 from RMB 73 billion to RMB 90 billion, while the capital expenditure for the fiscal year 2026 has been raised from RMB 87 billion to RMB 102 billion.

The Platformization Strategy of the Gaming Business Releases Growth Potential

The report believes that Tencent's "platformization" gaming strategy is helping it to break free from reliance on a single blockbuster game, thereby reducing performance volatility.

Goldman Sachs has therefore raised its expectations for Tencent's gaming revenue growth for the fiscal years 2025 and 2026 from the previous 15% and 8% to 18% and 11%, respectively. The confidence in growth mainly comes from the following aspects:

• The potential of "Delta Force" is enormous: This game has shown the potential to become the "next franchise-level evergreen game." In July, its daily active users (DAU) ranked among the top five in the industry, and its revenue ranked in the top three. Goldman Sachs predicts that the annualized revenue of this game will reach approximately RMB 9 billion (RMB 6.5 billion from mobile games and RMB 2.4 billion from PC).
• The mobile version of "Valorant" is about to launch: The mobile version of "Valorant," scheduled to launch on August 19, is another short-term growth engine. The game has already garnered over 60 million pre-registrations on mobile, and the DAU for the PC version reached a new high in the second quarter. Goldman Sachs predicts its annualized revenue will reach RMB 7 billion.
• Evergreen games show resilience: Core games such as "Honor of Kings" and "Peacekeeper Elite" continue to perform steadily, contributing to growth.

High Growth of Advertising Business is Sustainable, Monetization Potential is Far from Exhausted

The advertising business is another highlight of this financial report.

Goldman Sachs believes that its high growth is sustainable and has raised its expectations for marketing service revenue growth for the fiscal years 2025 and 2026 to 19% and 16%, respectively. The growth runway is clearly visible:

• AI-driven efficiency improvements: AI technology continues to optimize the click-through rate and conversion rate of ad placements, bringing higher ROI to advertisers.
• Acceleration of commercialization for Video Accounts and Search: Revenue from Video Accounts and WeChat Search grew by 50% and 60% year-on-year in the second quarter, respectively. More importantly, the current ad loading rate for Video Accounts is only in the low to mid-single digits percentage, while peers have reached mid to high double digits percentage, indicating huge long-term monetization space.
• Transaction closure enhances revenue per click: Through the mini-program e-commerce closure, Tencent can effectively enhance the revenue generated per click. In the second quarter, advertising revenue from mini-programs grew by 50% year-on-year.

Goldman Sachs believes that Tencent remains one of the companies among Chinese internet giants with the most visibility and sustainable profit growth prospects. However, future risks still need to be monitored, including intensified competition in the advertising industry, unexpected delays in game releases/license approvals, financial technology and cloud business growth falling short of expectations, and reinvestment risks.

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