Tencent 3Q25 Quick Interpretation: Tencent's third-quarter performance remains stable, slightly exceeding expectations overall. The revenue highlight is overseas games, while the net profit beat is due to investment income and share of profits outside the main business. The operating profit of the main business alone is actually inline.

It is worth mentioning that the significant deviation from market expectations is in capital expenditure, where Tencent's Capex has significantly decreased quarter-on-quarter. Dolphin Research believes this reflects Tencent management's careful consideration of input-output (in contrast to Meta), but also suspects it may be influenced by the restrictions on overseas chips like H20, temporarily slowing down the procurement pace.

Looking at the performance of individual business segments:

1. Games exceeded expectations: Overall game growth in Q3 was 23%, with a slight acceleration on a high base. Overseas games performed exceptionally well, with a year-on-year growth rate of 43%, mainly benefiting from Supercell's 'Clash Royale'.

Domestic performance was also strong. Although the growth rate of 14% slowed compared to the previous quarter, last year's high base effect from 'DnFm' makes this growth impressive. The core drivers were new games like 'Delta Force' and 'Valorant' mobile games.

2. Advertising remains strong: Advertising growth in Q3 was 21%, with a slight acceleration quarter-on-quarter, mainly driven by increased ad load rates and AI's improvement in ROI (launching the intelligent delivery product AIM+, enhancing ad targeting and driving eCPM up).

In terms of specific ad types, contributions mainly came from Video Accounts, Search, and Mini Programs. Looking back, Tencent has maintained a strong and stable growth trend of over 15% each quarter for two consecutive years.

3. Fintech continues to recover: The combined revenue growth of Fintech and Business Services was close to 10%, in line with expectations. Fintech's high single-digit growth was mainly due to the recovery in payments and consumer loans. Cloud business grew 10-20% year-on-year driven by AI demand, which is not high. Dolphin Research speculates the main reason is the strategic requirement to prioritize internal supply of computing resources.

4. Gross margin stable: The group's gross margin increased by more than 1 percentage point year-on-year, with a slight decline quarter-on-quarter. The gross margin of self-developed games, Video Accounts, and Search offset the low-margin cloud business, while continuous AI investment has also started to increase depreciation and amortization (accelerating year-on-year growth by 23%, increasing the revenue ratio by 0.5 percentage points).

5. Expense growth: Operating expenses continued to accelerate by 19% in Q3, mainly from R&D expenses, with significant increases in R&D personnel and server costs. Secondly, promotional expenses in sales expenses, possibly related to the promotion of Yuanbao, the public testing of two major new games in the third quarter, and the tenth anniversary of Honor of Kings.

6. Initial signs of the impact of the investment cycle: The part of revenue exceeding expectations was basically offset by the expansion of costs and expenses. Core operating profit met expectations, but the profit margin weakened by nearly 2 percentage points quarter-on-quarter. The final Non-IFRS net profit exceeded expectations due to investment income and share of profits.

7. Capital expenditure temporarily slowed: Q3 capital expenditure was only 13 billion, significantly decreasing quarter-on-quarter and below the market's significant growth expectations. Q3 repurchased HKD 21.1 billion, continuing to increase slightly quarter-on-quarter, with the trend in the first three quarters being exactly opposite to capital expenditure. $TENCENT(00700.HK) $Tencent(TCEHY.US)