Guotai Haitong Securities has issued a research report maintaining a "Buy" rating on TENCENT (00700). The report notes that as the largest social traffic gateway, AI has the potential to reconstruct the platform's value. The firm forecasts TENCENT's revenue for 2026-2028 at 8,270/8,979/9,710 billion yuan, with adjusted net profits of 2,713/3,007/3,277 billion yuan. Based on comparable company valuations and considering short-term uncertainties in AI investments, a 2026 P/E multiple of 18x is applied, corresponding to a target price of 613 HKD. Key points from Guotai Haitong Securities are as follows:
Advertising and cloud businesses continue to drive growth, with increased AI investment. In Q1 2026, TENCENT reported revenue of 196.5 billion yuan, a year-on-year increase of 9%. Adjusted operating profit was 75.6 billion yuan, up 9% year-on-year (or 17% excluding new AI products). The adjusted operating profit margin stood at 38.5%, flat compared to the previous year. Adjusted net profit reached 67.9 billion yuan, an 11% increase year-on-year, with an adjusted net profit margin of 34.6%, up 0.5 percentage points. R&D investment totaled 22.5 billion yuan, with an R&D expense ratio of 11.5%, up 1.0 percentage points year-on-year. Capital expenditure was 31.9 billion yuan, a 16% increase year-on-year, while cash flow capital expenditure payments amounted to 37.0 billion yuan.
Game-related revenue deferred to the next quarter. In Q1 2026, the value-added services business generated revenue of 96.1 billion yuan, up 4.3% year-on-year, with a gross margin of 62.6%, an increase of 3.0 percentage points. Domestic and overseas game revenues were 45.4 billion yuan and 18.8 billion yuan, up 5.8% and 13.3% year-on-year, respectively. The growth rate of domestic game revenue lagged behind the growth rate of local market game turnover (which increased by over ten percentage points), primarily due to the later Chinese New Year in 2026 causing some revenue deferral. Evergreen titles such as "Honor of Kings," "Peacekeeper Elite," and "Delta Action" achieved record-high turnover this quarter, while the new game "Roco Kingdom: World" also gained significant popularity. Social network revenue was 31.9 billion yuan, down 2.2% year-on-year, attributed to reduced recognition of local mobile game item revenue due to the later Chinese New Year in 2026.
Total user time spent on Video Accounts increased by over 20% year-on-year. The Hunyuan large model has been rebuilt, and new Agent applications have been intensively launched. In Q1 2026, marketing services revenue reached 38.2 billion yuan, a 19.8% increase year-on-year. The intelligent advertising product matrix, TENCENT Marketing AIM+, empowered advertisers, with approximately 30% of marketing service spending coming from this platform, and it has been widely adopted by mini-game, short drama, and WeChat Shop advertisers. Financial technology and enterprise services revenue amounted to 59.9 billion yuan, up 9.1% year-on-year. Enterprise service revenue grew by 20% year-on-year, benefiting from increased cloud service revenue and WeChat Shop technical service fees.
The Hy3 preview large model leads in performance among models of similar parameter scale and has consistently ranked first on OpenRouter in terms of call volume since April 28. WorkBuddy has become the most popular efficiency AI agent service in China based on daily active users. Risk factors include slower-than-expected AI commercialization, the impact of AI investments on current profits, policy risks, and macroeconomic volatility.
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