Can Spend and Earn More! Is Tencent's Meta Moment Coming?

After the Hong Kong stock market closed on August 13th Beijing time, $TENCENT(00700.HK) $Tencent(TCEHY.US) released its second quarter 2025 results. Supported by the two major revenue pillars of gaming and advertising, the performance of the stock king remains reassuringly stable.

Specifically:

1. The value of evergreen games still has room for exploration: Q2 game growth was 22%, continuing strong growth. Domestic growth was 17%, overseas 35% (33% on a currency-neutral basis), with overseas revenue exceeding expectations.

Domestic games relied on new games like "Delta Force" and evergreen titles such as "Honor of Kings" and "Peace Elite" to withstand last year's high base pressure. In the third quarter, the mobile game "Valorant" is set to launch early, expected to continue the strong growth momentum.

Overseas games also mainly relied on evergreen games. In addition to the consistently stable "PUBG", Supercell's "Clash Royale" saw historical highs in revenue due to content updates and community interaction in the second quarter. Additionally, a new game "Dune: Awakening" was released in the second quarter, contributing some incremental revenue.

From deferred revenue, although Q2 saw a seasonal quarter-on-quarter decline, the fluctuation was smaller than historical norms, reflecting the current stability of revenue (focused on secondary development of evergreen games). With the support of the heavy mobile game "Valorant" next quarter, there is no need to worry excessively about last year's high base pressure from "DNFM".

2. Advertising growth continues to lead: Q2 advertising growth was nearly 20%, maintaining strong momentum. However, the industry's performance in the second quarter was generally mediocre, with 618 and offline consumption data being relatively lackluster, making Tencent's 20% growth rate particularly valuable.

The main drivers were 1) inventory release, i.e., increased ad loading rates, with mini-game ads and video account ads likely being the main growth drivers; 2) AI improving the ROI of ecosystem-wide ads.

3. Fintech further rebounds: Q2 fintech and enterprise services growth rebounded to 10%, with market expectations initially low due to the overall sluggish consumption environment. Dolphin Research believes that besides the video account e-commerce commission (with the establishment of the e-commerce product department in May, accelerating merchant entry) and Tencent Cloud (with computing power mainly for internal use, thus only expecting 15%-20% growth), the major component of commercial payments has already resumed growth in the second quarter.

4. Ignoring AI cost pressure, core business profitability can still improve: With AI increasing capital expenditure for a year, the market has concerns about its impact on Tencent's profit margins. Although Dolphin Research believes that during the AI innovation period, investing in long-term growth is more valuable than maintaining short-term profits, the reality is that Tencent has not stopped improving its core business profitability.

Especially the indicator that Dolphin Research has always focused on (excluding the impact of non-core business items such as investment income) — Q2 core business operating profit grew 29% year-on-year, with momentum further strengthening, and the profit margin was 34.5%, continuing to increase by nearly 2 percentage points quarter-on-quarter, with cost and expense optimization contributing about 1 percentage point.

The specific reasons for the breakdown are that the gross profit margin mainly increased due to the higher proportion of high-profit-margin businesses such as gaming and advertising, and the strategy of focusing on evergreen game IP development has made the monetization efficiency of new games in recent years higher than before. In terms of expenses, growth mainly reflects the amortization costs brought by AI servers, bandwidth, equipment depreciation, and the cost of R&D personnel, but overall, it remains relatively controllable.

Non-IFRS net profit in the second quarter grew 10% year-on-year, with growth significantly lower than core operating profit growth, mainly due to a 42% year-on-year decline in the share of profit from associates, partly because Pinduoduo's profit was overestimated in Q1, and the actual result was lower than expected, leading to adjustments in Q2.

5. Due to short-term bans, capital expenditure decreased: Regarding cash flow and capital allocation, Dolphin Research focuses on capital investment and repurchase situations. Q2 still saw good growth in the cash cow businesses of gaming and advertising, so net operating cash inflow remained high at 74.4 billion.

Q2 Capex was 19.1 billion, down 30% quarter-on-quarter, likely mainly due to the impact of the H20 ban. Previously, H20 supply was relaxed, and Tencent reportedly immediately placed new orders, so future investment expansion is expected to continue. Q2 repurchases increased, but overall remained within the budget framework of 80-90 billion, flexibly adjusted with market value fluctuations.

7. Detailed financial report data overview

Dolphin Research's View

Despite the massive absolute scale, Q2 performance growth remains strong. Previously, some market funds had concerns about the high base pressure of games, but last week, the mobile game "Valorant" announced an early launch due to good internal testing data, and with the potential explosive product relay, these concerns have been largely dispelled.

Of course, beyond the traditional business cycle itself, Dolphin Research's main focus remains on the "chemical reaction" of AI on the stock king. In the second quarter, we continued to see AI-driven growth in advertising, gaming, and Tencent Cloud: (1) Advertising achieved high growth against the trend by improving ROI through AI; (2) Gaming generated more rich content through AI, repeatedly stimulating user activity in evergreen games, extracting more value potential and high-efficiency monetization capabilities even in the off-season; (3) Tencent Cloud also gained more external demand due to AI, although current computing power still prioritizes internal needs, AI offers more growth possibilities for Tencent Cloud after significant adjustments in recent years.

Beyond business growth, Q2 performance also showcased the efficient operation of a large organization under high control. Dolphin Research believes that besides Tencent's own operational management capabilities, like overseas giants, AI can also help improve the operational efficiency of internet platforms — although there is a high upfront investment in the short term, it can continuously optimize the cost of basic development resources in the long term.

In terms of valuation, due to recent interest rate cut expectations and policy stimulus bringing sustained warming sentiment, and the unexpected profit performance of two subsidiaries yesterday, Tencent's stock price has risen 17% since the Q1 financial report release.

However, due to the continuous outperformance of gaming and advertising, coupled with the impressive revenue from "Delta Force" in Q2 due to map updates, the early launch of "Valorant" mobile game, and the potential AI-driven benefits for Tencent advertising similar to Meta, Dolphin Research believes the current market expectations for 15% game growth and 10% total revenue growth this year seem slightly conservative.

After slightly adjusting the consensus expectations (+2%), the current market capitalization of 5.36 trillion HKD corresponds to a post-tax Non-IFRS net profit of approximately 19x/17x for 25/26, which is still not too expensive considering the growth rate. Standing at the current point, Dolphin Research remains optimistic that Tencent can unleash more "unexpected" growth potential in the AI era, and this growth imagination is expected to continue driving the current valuation upward.

Detailed Analysis Below

I. Steady Expansion of the WeChat Ecosystem

In the second quarter, WeChat users reached 1.411 billion, with a net increase of 9 million quarter-on-quarter, mainly driven by video accounts, mini-games, and WeChat Yuanbao, while QQ continued to decline quarter-on-quarter.

The Yuanbao, which was fully distributed last quarter, has seen its growth slow down after being integrated into WeChat, with the independent app currently leading in both absolute scale and growth rate in the domestic industry, with only Doubao ahead. Therefore, for overall user activity of Yuanbao, it is worth paying attention to the management's report on progress during the conference call.

Regarding the super AI strategy, AI Chatbot is just one application direction. From Tencent's current strategic direction, the entire WeChat ecosystem will also combine the invocation of mini-programs to launch a more intelligent, task-oriented AI Agent. The subsequent launch path is worth anticipating and paying attention to.

In terms of the proportion of overall ecosystem duration, Tencent temporarily remains stable at 31%. The share lifted at the end of the first quarter due to Yuanbao has also declined in the second quarter after the growth of the independent app slowed down. In contrast, ByteDance's share continues to increase slowly.

In the second quarter, the number of paid users for value-added services decreased by 4 million quarter-on-quarter, mainly in Tencent Video. Tencent Video had 114 million paid users in the second quarter, down 3 million quarter-on-quarter. Other content payments currently maintain efficient growth under cost control, without blindly promoting sales. For example, Tencent Music increased by 1.5 million users, and Yuewen only saw a net increase of 100,000 paid users compared to the beginning of the year.

II. The Value of Evergreen Games Still Has Room for Exploration

In the second quarter, online game revenue was 59.2 billion, up 22% year-on-year, with domestic growth at 17% and overseas growth at 35%, exceeding expectations mainly overseas.

(1) Domestic Market: Besides the contribution of the new game "Delta Force", evergreen games once again took the lead in absolute incremental growth. Dolphin Research learned from research information that evergreen games "Honor of Kings" and "Peace Elite" saw year-on-year increases of about 10% and 20%, respectively.

"Honor of Kings" mainly benefited from IP collaboration, with multiple new skins launched; "Peace Elite" mainly benefited from the current shooting craze, as a MOBA competitive game relying on DAU, popularity is the determining factor, and user activity depends heavily on social relationships besides official events and buying promotions, which is where Tencent can excel.

Additionally, new games like "Delta Force" and "Dark Zone Breakout: Infinite" launched, and the integration of new gameplay "Search, Fight, Withdraw" may have somewhat boosted the current popularity of shooting games.

As shown in the chart below, the DAU of Tencent's four main shooting games remained stable, with no significant internal erosion issues, indicating that the overall shooting game market is expanding.

(2) Overseas Market: Q2 saw explosive growth, driven by old games like Supercell's "Clash Royale" and "PUBG Mobile", and new game "Dune: Awakening" contributed incremental revenue.

Deferred revenue calculated from the revenue indicator better represents the forward-looking indicator of real demand. Deferred revenue in the second quarter grew 13% year-on-year, although seasonally declining quarter-on-quarter, the fluctuation was smaller than historical norms, reflecting the current stability of revenue (focused on secondary development of evergreen games). With the support of the heavy mobile game "Valorant" next quarter, there is no need to worry excessively about last year's high base pressure from "DNFM".

III. Advertising Benefits from Inventory Release and AI Efficiency Improvement

The overall environment remained under pressure in the second quarter, but Tencent advertising maintained nearly 20% growth, slightly exceeding market consensus expectations, continuing to lead the industry. However, channel research before the financial report already had positive feedback, so optimistic funds' expectations may not be low.

The direct factors driving growth remain increasing loading rates and releasing inventory, mainly reflected in video account and mini-program ads, while AI also improved the ROI of ecosystem-wide ads.

(1) Q2 mini-game IAP revenue grew 20%, indicating high user activity, so the scale of IAA ads should also grow well.

(2) In May, WeChat established an e-commerce product department, accelerating merchant entry, promoting the expansion of the e-commerce ecosystem mainly based on video accounts and WeChat stores, and subsequent ad monetization.

Of course, from the perspective of merchant budget allocation, it fundamentally reflects merchants' recognition of the value of the WeChat ecosystem.

As the platform with the highest user stickiness and largest scale, WeChat is also seen by merchants as the last gathering place for private domain traffic in the true sense, a platform that can help establish long-term reputation. Therefore, the health of the WeChat ecosystem will naturally be valued and jointly maintained by merchants, keeping high requirements for product quality and brand influence. This is conducive to the long-term maintenance of quality in the ecosystem after further improving the e-commerce layout.

In the second quarter, there were some small benefits to Tencent channel ads at the beginning of the takeaway war. However, as subsidies intensified at the end of the second quarter and beginning of the third quarter, some marketing budgets were shifted to subsidies, so Q3 ad growth may be affected. Fortunately, for now, the marginal slowdown and stabilization of subsidy intensity are expected to no longer significantly increase the impact on Tencent channel ads.

IV. Fintech Has Rebounded, Enterprise Services Steady Growth

Q2 fintech and enterprise services grew 10% year-on-year, accelerating improvement quarter-on-quarter. Due to the consumption environment, considering the drag on commercial payment revenue, market expectations were low.

Breaking it down, 2/3 of payment revenue has already returned to positive growth, with a similar trend of gradual improvement in the total amount of third-party reserve funds collected by the central bank, indicating that the main driver is the warming environment. Enterprise services (cloud business and video account commissions, etc.) continue steady growth, with Dolphin Research estimating year-on-year growth accelerating to 21%, up from 15% last quarter (estimate for reference only).

Strong external demand from enterprise customers also drove some incremental cloud revenue, including GPU resistance and API token usage. However, according to the group's strategy, Tencent Cloud's computing power prioritizes internal needs, meaning Tencent's desire to expand cloud revenue is insufficient, so future growth expectations for this part of revenue should not be overly exaggerated.

V. Investment Gains: Adjusting Pinduoduo Profit Estimates, Share of Profit Declines Year-on-Year

Regarding investment gains, Dolphin Research mainly looks at other net gains (including investment income) and the share of profit from associates/joint ventures based on the original indicator definition.

In the second quarter, there was still not much asset disposal, so comprehensive investment income mainly came from the share of profit and the increase in the fair value of investment assets. However, Q2 share of profit declined 40% year-on-year and did not grow quarter-on-quarter, with the company mentioning that it was mainly due to a decrease in estimated profit from an invested associate.

Dolphin Research speculates that this company might be Pinduoduo. Tencent's financial report precedes Pinduoduo, so this part of the income mainly relies on Tencent's internal estimates, and then adjustments are made in the next quarter based on actual conditions. Pinduoduo's Q1 profit indeed significantly missed expectations, so the poor Q2 share of profit likely includes "adjustment correction" factors.

As of the end of the second quarter, the total scale of joint/associate assets was 3.144 trillion, calculating Tencent's investment return rate in the second quarter at 5.7% (annualized), remaining stable quarter-on-quarter.

VI. Core Business Profitability Potential Still Being Released

Adjusted net profit in the second quarter was 63.1 billion, up 10% year-on-year, only slightly above market expectations. However, from the core business operating profit (= gross profit - operating expenses), excluding the impact of fluctuations in the share of profit from associates, the actual core operating profit grew 29% year-on-year, significantly exceeding market expectations, with a profit margin of 35%, up 4 percentage points year-on-year.

Let's take a look at how such a high profit margin came about:

1. Increased proportion of high-margin cash cows

Games and advertising are relatively high-margin businesses, so the continued high growth of these two gold mines has a good pull on both profit margins and cash flow. Q2 profit margin increased by 3 percentage points year-on-year to 57%, setting a new historical high.

Profit margins across businesses also rose, with value-added services and fintech setting new highs.

(1) In value-added services, the strategy of focusing on evergreen game IP development reduced external channel dependency, lowering distribution costs. Meanwhile, in May, Epic and Apple made progress in their dispute over introducing external payment links, although currently only applicable in North America and the EU, it also brings more imagination for future monetization space in the gaming business.

(2) The improvement in fintech business profit margin was driven by the improvement in cloud business profit margin, as well as the expansion of high-margin businesses such as video account e-commerce commissions and consumer loans.

2. Unafraid of AI incremental costs, operational efficiency continues to improve

With AI increasing capital expenditure for a year, the market has concerns about its impact on Tencent's profit margins. Although Dolphin Research believes that during the AI innovation period, investing in long-term growth is more valuable than maintaining short-term profits, the reality is that despite unavoidable growth in R&D, overall operating expense investment remains controllable.

Q2 R&D expenses grew 17%, with personnel salaries growing 8%, mainly driven by amortization costs from AI servers, growing 58% year-on-year, accelerating quarter-on-quarter, and this trend is expected to continue for the next two years.

Efficiency improvements in Q2 management and sales expenses mainly reflected in sales promotion expenses, aligning with Dolphin Research's previous discussion on the evergreen game strategy and the overall improvement in game monetization efficiency.

In terms of employee numbers, Q2 saw an increase of 1,800 compared to the end of Q1, possibly due to seasonal recruitment near graduation season. From average salary per employee, it indicates Tencent's strong demand for high-salary AI-related R&D personnel. However, R&D personnel salaries only grew 8% year-on-year, possibly due to optimization of basic development personnel while recruiting new AI talent.

Based on experiences from Meta and Google, AI can replace many parts of comprehensive operational work and basic code writing. Therefore, Tencent's large organizational structure has room for long-term optimization.

3. Capex temporarily decreased due to bans

Q2 capital expenditure was 19.1 billion, down 30% quarter-on-quarter, likely mainly due to the impact of the H20 ban. Recently, H20 supply was relaxed, and Tencent reportedly placed new orders, so Q3 capital expenditure is expected to rebound quickly. The conference call can focus on whether Tencent has new adjustments to its annual capital expenditure budget based on current demand and supply changes.

VII. Returning to Growth May Offset Major Shareholder Selling Pressure

Finally, let's briefly look at repurchase and sale situations. From the last financial report disclosure to now, Tencent's total shares net decreased by 35 million shares over 3 months. During the same period, major shareholder selling slightly weakened, selling nearly 37.8 million shares over 3 months, reducing their stake in Tencent to 22.98%, down 0.32 percentage points. Overall, it remains within the budget framework of 80-90 billion repurchases, flexibly adjusted with market value fluctuations.

From the average daily repurchase scale, the intensity weakened since Q2, clearly unable to offset the impact of major shareholder selling. However, with Tencent's growth story, optimistic funds increase, and it doesn't need to rely entirely on its own repurchases to support major shareholder selling. This indicates that self-improvement is essential, mainly having growth, not fearing abnormal selling by individual shareholders.