Focus on Tencent Investor Meeting: AI ignites a new growth engine, multiple business lines working together, Bank of America target price HKD 690!

According to the Zhitong Finance APP, on August 20, Bank of America released a report titled "Tencent Holdings: Key Points from the Investor Meeting," maintaining a "Buy" rating for Tencent with a target price set at HKD 690, while the current Tencent stock price is HKD 593, indicating potential for growth.

In the report, Bank of America expressed optimism about Tencent's AI potential, sustainable growth in core business, and profit margin performance, believing that the upgrade of the mixed Yuan model and the acceleration of Yuanbao promotion will become important catalysts.

AI: Building an Ecological Closed Loop, Multi-Dimensional Breakthrough

In the field of AI, Tencent is fully investing resources to upgrade and optimize the mixed Yuan foundational model. A strong foundational model is key to building a fully integrated closed-loop AI ecosystem.

Regarding Yuanbao, Tencent has recently promoted other applications to channel users to Yuanbao, successfully driving an increase in Yuanbao user numbers. With the upgrade of the mixed Yuan model, Yuanbao's functionality will be significantly enhanced, and Bank of America expects that more cross-promotion activities in the future will further accelerate Yuanbao user growth.

AgenticAI in WeChat is a significant unique advantage for Tencent. Its mini-program ecosystem allows service providers and businesses to deploy code, closely linking with social, payment, and login systems. Notably, Kakao is set to launch AI services next month, which is expected to showcase the powerful capabilities of super agents, providing a reference for Tencent's related businesses.

On the commercialization front, the revenue opportunities brought by AI have already emerged in advertising, gaming, and cloud services. In the future, advertising revenue from native AI applications and commission/transaction revenue from AgenticAI both hold enormous potential. Tencent's capital expenditure is dynamic and primarily depends on chip supply conditions. The fourth quarter of 2024 is in a phase of compensating for previous under-expenditures, returning to normal levels in the first quarter of 2025, while the second quarter of 2025 may see a decline due to supply issues.

Fintech and Enterprise Services: Emerging from Difficulties, Steady Recovery

The payment business is experiencing a turnaround, with commercial payments turning positive year-on-year in the second quarter of 2024, thanks to stable price levels. Bank of America expects that the payment business will continue to recover, and accelerated growth in the second half of the year will help offset the impact of slowing growth in the gaming business.

In terms of credit business, the current environment is becoming increasingly favorable. Low interest rates, high household savings, macroeconomic stability, and improvements in non-performing loan indicators all create favorable conditions for the development of credit business. Tencent is gradually deploying AI to assist in credit scoring, and its growing e-commerce business provides a natural application scenario for consumer loans.

The cloud business maintains double-digit year-on-year growth. Tencent has a competitive advantage in real-time communication solutions and is continuously capturing the growing demand from enterprises.

Advertising Business: AI as the Core Driving Force

The driving role of AI in the advertising business has been validated by Meta, and Bank of America believes that with more data and rich user interaction services such as payments, content, mini-programs, and small stores, Tencent's performance in this area will not lag behind Meta.

In the second quarter of 2025, over half of the advertising growth will come from the increase in cost per thousand impressions, thanks to improvements in click-through rates (CTR), while the remaining portion will come from an increase in impressions. The improvement in click-through rates is mainly due to two aspects: first, the expansion of data dimensions, covering a longer time range and cross-referencing user content interactions; Second, the algorithm upgrade of the basic model.

In the future, the growth of the advertising business will continue to benefit from the dividends brought by AI, the increase in click-through rates, the traffic of video accounts (advertising loading rates may improve), the deepening of closed-loop transactions, and the advancement of search commercialization.

Gaming Business: Dual Support from AI and Engine Upgrades

AI enhances the production efficiency of game content, while superior game engines (such as Unreal Engine 5) help gradually upgrade game graphics. High-quality and high-frequency updates of game content can improve game performance and extend the game lifecycle.

Tencent holds an optimistic view on opportunities in the international gaming market, with its expertise in technology, productivity, and Games as a Service (GaaS) constituting a significant advantage.

Profit Margin: Continuous Expansion with Vast Potential

Tencent's gross margin is expected to continue expanding, with significant potential driven mainly by:

Gaming Business: More favorable app store revenue sharing, a business mix leaning towards high-margin self-developed games and cross-platform games, and progress in allowing external payments in app stores in overseas markets.

Fintech and Enterprise Services: An increase in the proportion of high-margin financial products.

Advertising Business: An increase in the proportion of video account ads and mini-program ads, with faster growth.

Mini-Program Store: Focus on Enhancing Service Capabilities

The total merchandise transaction volume (GMV) of WeChat mini-program stores is growing rapidly, with minimal impact from external factors. The conversion from mini-program GMV to mini-program stores has brought higher overall commission rates and more transaction data, which greatly benefits the advertising business. Tencent's management stated that they do not plan to participate in the food delivery competition and will focus on enhancing the ecosystem service capabilities of mini-program stores, including delivery, returns, and product variety.

Target Price Basis and Risk Warning

Bank of America sets a target price of HKD 690 for Tencent, based on two main points: first, a discounted cash flow (DCF) calculation of Tencent's comprehensive business, with a weighted average cost of capital (WACC) of 8.6%, a projected compound annual growth rate (CAGR) of 9% from 2021 to 2028, and a terminal growth rate of 4%, corresponding to a value of HKD 616; second, a contribution of HKD 74 from investment equity, including HKD 64 from listed invested companies and HKD 10 from discounted non-listed invested companies.

However, investing in Tencent also requires attention to potential risks, including competition from new traffic platforms and media formats, regulatory risks in multiple fields such as fintech, weakening momentum for new games, cost pressures from new game promotions and AI investments, the impact of macroeconomic weakness on advertising and fintech businesses, geopolitical risks, and the impact of AI investments on profits.

At the same time, there are many upside risks, such as better-than-expected macroeconomic recovery, outstanding performance of new games, synergistic effects from ecosystem openness with other internet platforms, accelerated development of e-commerce business, removal from the 1260H list boosting investor confidence, and breakthroughs in AI applications.

Overall, Bank of America believes that under the strong drive of AI, Tencent's core business lines are working in synergy, and the future growth potential is considerable, making it worthy of investors' attention