Tencent 2025 Interim Report Data Interpretation

Brief Review

On August 14, Tencent Holdings released its mid-year report for 2025, with key performance data shown in the table below. Once again, it exceeded expectations comprehensively, delivering a nearly flawless report card.

1) Q2 Operating Revenue was 184.504 billion, a year-on-year increase of 14.52% (Q1 was 12.87%), exceeding expectations by about 3% and slightly accelerating compared to the previous quarter;

Net Profit Attributable to Shareholders was 55.628 billion, growth rate 16.79% (Q1 was 18.71%), with a slight decline in growth rate;

Non-International Net Profit Attributable to Shareholders was 57.313 billion, growth rate 10.01% (Q1 was 22.01%), with a significant decline in growth rate but still above expectations;

The 10% Non-International Net Profit Attributable to Shareholders growth rate is significantly lower than the revenue growth rate, almost the only "eye-catching" presence in this report, but Tencent also explained in the mid-year report that the 10% is mainly affected by the decline in earnings of associated companies (mainly guessed to be Pinduoduo ).

If this impact is excluded, the value that more truly reflects the main business growth rate increases to 20%, higher than the revenue growth rate.

2) Looking at revenue by business segment, games, advertising, and financial enterprise services all exceeded expectations:

i) Value-added Services 91.368 billion, a year-on-year increase of 15.92%; the growth in games made a major contribution.

Among them, domestic games were 40.4 billion, a year-on-year increase of 17%; mainly benefiting from the revenue contribution of "Delta Force", as well as the revenue growth of evergreen games such as "Honor of Kings", "Valorant", and "Peacekeeper Elite".

Compared with the overall trend of Chinese mobile games released by Gamma Games, Chinese mobile games increased by 16.55% year-on-year from January to June, basically equivalent to the domestic game growth rate of Tencent.

At the end of the half-year, Tencent's deferred revenue was 125.31 billion, a year-on-year increase of 12.12%, still maintaining a relatively high level, providing support for Tencent's game revenue in the next few quarters;

International games were 18.8 billion, a year-on-year increase of 35%, benefiting from the revenue growth of games under Supercell and "PUBG MOBILE", as well as the revenue contribution of the newly released "Dune: Awakening";

Social Network revenue was 32.2 billion, a year-on-year increase of 6%;

ii) Marketing Services Business (Advertising) revenue was 35.8 billion, a year-on-year increase of 20%;

The growth rate this season is basically the same as last season and higher than expected, mainly benefiting from AI-driven improvements to the advertising platform and the enhancement of the WeChat transaction ecosystem, driving strong demand from advertisers for video accounts, mini-programs, and WeChat search.

iii) Financial and Enterprise Services revenue was 55.5 billion, a year-on-year increase of 10%;

This part also exceeded expectations and returned to double-digit growth, with the increase in financial technology service revenue mainly coming from the increase in revenue from commercial payment activities in Q2; while the increase in enterprise service revenue mainly came from the growth in AI demand from enterprise customers: more GPUs can be used for external leasing after meeting internal needs, thereby bringing revenue growth.

iV) Other revenue was 1.838 billion, a year-on-year decrease of 7.36%;

3) Cash Flow:

Operating Cash Flow was 78.915 billion, a year-on-year increase of 45.85%;

Free Cash Flow was 43 billion, a year-on-year increase of 6.44%;

Despite the significant increase in AI capital expenditures in Q2, free cash flow was still able to maintain positive growth, which is not easy.

4) Buyback:

As of today, Tencent has repurchased for 62 days in 2025, with a cumulative repurchase of 88.884 million shares, and a cumulative repurchase amount of 40.043 billion, while the repurchase amount for the same period last year was 61.362 billion.

During most of the time after the release of the first-quarter report, Tencent's stock price basically remained above 500, while Tencent maintained a repurchase scale of "Teng Five Billion".

In 2024, from the release of the second-quarter report to the end of the year, Tencent repurchased for 64 days. Assuming the same for 2025 and still conducting a five-billion repurchase, Tencent's annual repurchase amount will be 72.043 billion.

In the telephone performance meeting after the 2024 annual report, the management announced that the repurchase scale for 2025 will not be less than 80 billion Hong Kong dollars, higher than the 72.043 billion calculated according to "Teng Five Billion".

This also brings a new problem to Tencent's management: if the stock price continues to rise, whether to at least maintain the repurchase scale of five billion, or even increase it to complete the annual repurchase task of 80 billion.

I think it is very likely because Tencent's cash flow is sufficient to support it;

But if the annual repurchase scale is slightly lowered due to changes in the actual situation, I also think it is completely acceptable, after all, repurchase is not necessarily the optimal way to use cash, leaving more ammunition for AI investment can also bring more potential growth space in the future.

5) AI:

AI is still the most concerned topic in the mid-year report and subsequent telephone performance meeting this quarter.

In the telephone performance meeting after the 2024 annual report, Tencent's management announced that the capital expenditure on AI in 2025 will account for a mid-to-low double-digit percentage of annual revenue, which is about 80 to 100 billion.

The AI capital expenditures for Q1 and Q2 in 2025 were 27.476 billion and 19.107 billion respectively, totaling about 46.583 billion, roughly at half the level;

In this season's telephone performance meeting, the management also mentioned that there is no plan to modify the annual capital expenditure guidance.

AI investment may bring two issues:

First is the balance between cash flow in AI capital expenditure and repurchase, based on Tencent's increasingly growing earning ability, it can be seen that it has not brought too much pressure to Tencent;

Second is the impact of current AI investment on profit margins: the benefits of AI investment may be more reflected in the future, and the management also mentioned in the telephone performance meeting that it is still exploring how to achieve revenue from AI payment.

However, it should be said that compared with other domestic internet companies that are also investing heavily in AI, Tencent is considered to be the first and better to apply AI to its main business, and has already achieved significant results.

For example, especially in the game direction, AI-generated virtual teammates and non-player characters have increased player retention time, and AI-driven marketing initiatives have attracted more new players;

In the advertising direction, AI's application in advertising creation, placement, recommendation, and effect analysis has improved ad click-through rates and conversion rates, as well as advertisers' return on investment.

Although it is difficult to quantify the specific contribution of AI to revenue in various businesses, from the released data, Tencent's revenue growth rate in various main businesses in recent quarters should be said to be inseparable from the promotion of AI;

Tencent's additional investment in AI capital expenditure has not currently affected its main business profit margins, while retaining the possibility of greater returns in the future.

6) Valuation:

Based on the closing price of Tencent on August 13, Tencent's market value is about 5.36 trillion Hong Kong dollars, converted to RMB at the current exchange rate is about 4.90 trillion yuan, deducting "the fair value of equity in listed investment companies" of 714.3 billion yuan, and directly deducting "the book value of non-listed investment companies and wealth management" of 398.034 billion, the remaining market value is 3.79 trillion yuan; corresponding to the non-international standard net profit attributable to shareholders, PE-TTM is 15.81, which has increased significantly compared to 25Q1.

Of course, since the beginning of this year, Tencent has cumulatively increased by 41.75%, and the stock price has reached 586 Hong Kong dollars, just one step away from 600;

For Tencent investors, the naturally concerned question next is: After the mid-year report, will Tencent's stock price break through 600 and continue to rise?

At least for me, this is actually a question outside my circle of competence that I cannot answer.

Because the rise in stock price comes from the joint improvement of performance and valuation, it is clear that this 41.75% increase has contributions from performance improvement, but more undoubtedly comes from the improvement in valuation.

The improvement in valuation firstly comes from the emergence of Deepseek, the renewed understanding of Chinese technology companies, and the increased investment in AI by Chinese technology companies compared to before, which has brought an improvement in expectations for future growth;

Secondly and more importantly, it comes from the significant improvement in liquidity in the Hong Kong stock market this year.

For me, I think Tencent's current valuation is not expensive, but it is also hard to say it is undervalued.

As a long-term investor, I believe that in the next 3 to 5 years, Tencent's various businesses can at least maintain steady growth, and directions such as video accounts, WeChat e-commerce, and AI may even achieve major breakthroughs; but whether it can continue to rise in the short term may not be so closely related to Tencent's own performance.

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