Last night, companies including $TENCENT(00700.HK) were added to the 2025 CMC (Section 1260H of the National Defense Authorization Act) "Military-Related Companies" list. The main sanction measure is that the U.S. Department of Defense cannot procure products or technologies from the listed companies. Amid Tencent's rare significant drop, Dolphin Research briefly discusses:

1. Reasons and Impact of the Sanctions

1) This "sanction" has no impact on Tencent's business. Referring to the "experience" of successfully litigated companies like Xiaomi, Hesai, and AMEC, Tencent may also have been mistakenly identified as having an affiliated or subordinate relationship with the Ministry of Industry and Information Technology (possibly just participating in its projects) and thus labeled as a "contributor to civil-military integration."

2) Tencent has the opportunity to appeal, and the process will involve back-and-forth. For reference, Xiaomi and AMEC took 4 months from appeal to final victory and removal. Currently, Tencent has officially stated it will actively communicate with the U.S. Department of Defense.

3) While the misunderstanding will likely be resolved eventually, in extreme cases, Tencent could be further moved from the CMC list to the NS-CMIC list, which would restrict investments from U.S. investors. There is an expected 60-day window from being listed on the NS-CMIC list to its enforcement.

2. If It's a "Misunderstanding," Why the Drop Now?

1) The worst-case scenario of the aforementioned investment restrictions is not entirely zero-probability, so some funds (mainly foreign capital) may adopt a risk-averse mindset (including chain reactions like selling early due to concerns over short-term stock performance). Time is needed to digest the negative news.

2) The current macro environment is weak, with a "policy vacuum + exchange rate pressure + Trump's imminent inauguration." Before the Two Sessions policy period arrives, expectations are shifting from strong to weak, and short-term funds lack strong buying interest. Thus, as risk-averse funds sell, the buying power from bullish funds is insufficient.

3. Tencent's Valuation and Trading Logic

1) Tencent's current market cap of HKD 3.5 trillion, based on 2025 expectations, implies an EV/Non-IFRS NP of 13x, at a historical bottom. While Chinese tech valuations are under pressure, Tencent's valuation is notably low and lacks the premium seen in U.S. tech giants.

2) The fundamentals are far from declining, with no shortage of short- and long-term catalysts.

1) This year's focus is on WeChat e-commerce, including synergies with Channels and Mini Stores, as well as opportunities from Gen-AI (advertising, cloud, etc.) and cost optimization (content cost reduction, workforce efficiency). 2) In other core businesses, domestic games may slow slightly due to high base effects, but the pipeline is not lacking. New titles like "Delta Force" are performing well, ranking around 10th on Steam's online player chart and staying in the top 10 on iOS free charts. Payment services will see incremental growth from e-commerce, with additional focus on offline consumption recovery and proactive expansion of consumer loans like Fenfu.

3) In terms of shareholder returns, Tencent repurchased HKD 112 billion in 2024. Yesterday marked its first repurchase in 2025, with no reduction in intensity. During the appeal process, the company may further increase buybacks to counter stock price impacts.