Daiwa: Tencent Holdings' gaming revenue confirmation timing leads to slightly lower first-quarter income, target price lowered to HKD 700, rating "Buy"

Zhitong Finance APP learned that Daiwa released a research report reiterating its "Buy" rating on Tencent Holdings (00700) and lowered its 12-month target price calculated using the sum-of-the-parts (SOTP) valuation method from HKD 710 to HKD 700, equivalent to an average forecast price-to-earnings ratio of 19.3 times for 2026 to 2027. Downside risks include weaker-than-expected game and advertising sales, as well as higher-than-expected AI spending.

Tencent's revenue in the first quarter grew by 9% year-on-year, slightly below market expectations, mainly due to timing differences in game revenue recognition; while non-International Financial Reporting Standards (non-IFRS) adjusted net profit increased by 11% year-on-year, in line with expectations, benefiting from resilient profit margins despite a significant increase in artificial intelligence (AI) spending. The firm believes that while it is still too early to discuss the timeline for AI monetization, Tencent's willingness and ability to invest in AI is becoming increasingly positive, with its AI team restructured, a clearer ecosystem roadmap, and improved domestic chip supply supporting the "invest first, returns later" strategy.

The firm pointed out that value-added services (VAS) revenue was below expectations, mainly due to weak game revenue (turnover). Domestic game revenue grew by 6% year-on-year but was affected by the later Lunar New Year, leading to a shortened revenue recognition window; international game revenue grew by 13% year-on-year, slightly below expectations, impacted by a high base and normalization of integration benefits. Although social network growth is structurally weak, domestic game growth is expected to accelerate from the second quarter of this year, benefiting from deferred revenue recognition driving multi-quarter catch-up. AI investment accelerated in the first quarter of this year, with capital expenditure reaching RMB 31 billion, an 18% year-on-year increase; R&D expenditure reached RMB 23 billion, a 19% year-on-year increase. The firm expects AI spending (especially capital expenditure) to rise significantly, concentrated in the second half of this year. Daiwa slightly lowered its earnings per share forecast for 2026 to 2028 by 2% to 4% to reflect the increased forecast for AI investment