UBS has released a research report cutting its price target for Tencent Holdings (00700) by 3.9%, from HK$770 to HK$740, while reiterating a "Buy" rating.
The bank expects Tencent's third-quarter revenue to grow 7%, a slowdown from the second quarter, with adjusted net profit declining 7% year-on-year to RMB 65 billion (versus 9% growth in the second quarter), mainly dragged down by artificial intelligence investments and a possible decline in the share of profit from associates.
The bank's segment-by-segment forecasts are as follows: In gaming, domestic market growth is expected to slow to 12% in the third quarter due to a high base (17% growth in the second quarter); the international market is forecast to decline 3% due to weak Supercell performance and a limited number of new game launches in the third quarter.
The advertising business is expected to grow 18% quarter-on-quarter, with growth moderating under persistent macroeconomic headwinds, as gains from ad tech upgrades, increased ad load on video accounts, and higher-eCPM ad formats (such as incentive ads and closed-loop ads) are being suppressed.
Fintech is expected to remain broadly stable, up 8% year-on-year, with weak payment business growth, but cloud business growth is accelerating slightly as chip supply improves and WorkBuddy subscription revenue increases.
On margins, the bank noted that gross margin is expected to be 57.2%, up 0.8 percentage points year-on-year, supported by a business mix shift toward higher-margin segments. Due to increased depreciation and AI operating expenses (which UBS estimates at RMB 16 billion), adjusted operating profit is forecast to decline 2% year-on-year to RMB 71 billion. Excluding AI investments, Tencent should continue to maintain operating leverage, with adjusted operating profit growth estimated at 13% (versus 19% in the second quarter).
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