$TENCENT(00700.HK) first take: Due to overly strong consensus expectations, the market had high hopes for the 'King of Stocks'. In such a challenging Q3 environment, beating expectations was simply too difficult. While Tencent's Q3 results did demonstrate relatively strong fundamentals, from an expectations perspective, the performance was mediocre - a mixed bag. This might explain why its recent stock performance has lagged behind. Additionally, from operating expenses and capital expenditure indicators, Tencent seems to be gradually ending its cost-cutting cycle, with investments in AI and other tech R&D now appearing in financial statements.

1. First, the adjusted net profit of 59.8 billion yuan was higher than market expectations of 54.4 billion yuan, which looks impressive but actually didn't exceed expectations. The main reasons were differences in market expectations regarding [Share of profits of associates] and [Effective tax rate]. Simply put, if we look at GAAP operating profit from core business alone, Q3's 50.4 billion yuan was actually below market expectations of 52.3 billion yuan.

2. So where was the profit shortfall?

(1) Revenue-wise, the actual variance compared to institutional expectations mainly came from overseas gaming revenue (yoy+9% vs consensus +12%). The company explained this was due to extended deferral cycles, with actual cash flow growth being higher. Fintech business was lower than Bloomberg consensus, but institutions had recently lowered expectations, so it matched the latest forecasts.

(2) The profit variance mainly came from the expense side. Tencent's three major expense items all increased in Q3, with promotion expenses and R&D spending rising noticeably. Promotion expense growth was related to intensive new game launches, while R&D breakdown showed server bandwidth costs growing faster than employee compensation. With capital expenditure increasing by 12 billion yuan this quarter, we speculate this was likely due to AI-related investments.

Tencent's net employee count increased by over 3,300 sequentially in Q3, contrary to Dolphin Research's previous expectations. We recommend paying attention to management's explanation during the earnings call about potential short-term disruptions. If the 'King of Stocks' truly re-enters an expansion cycle, maintaining profit growth levels would undoubtedly shift growth pressure to the revenue side.

Dolphin Research will discuss other operational changes reflected in detailed financial metrics in our subsequent comprehensive analysis.