Tencent Holdings' investment in artificial intelligence is surpassing prior market expectations. Bank of America Securities has significantly increased its capital expenditure forecasts for Tencent for 2026 through 2028 in a recent research report, while maintaining a Buy rating, stating the market is undervaluing the company's leadership in China's AI agent orchestration layer.
A report from Bank of America Securities, dated July 13, indicates analyst Alex Liu has raised the capital expenditure forecasts for 2026 to 2028 by 23% to 25%, adjusting them to 185 billion, 225 billion, and 250 billion yuan, respectively. The report notes that Tencent's leading position in China's AI agent orchestration layer is being overlooked by the market, with its WorkBuddy already ranking first domestically in terms of user scale.
Impact of Higher AI Investment on Profits
The increased AI spending is putting some pressure on profit forecasts. Bank of America has lowered its non-IFRS diluted earnings per share estimates for 2027 and 2028 by 3% and 6%, respectively, while keeping the 2026 figure largely unchanged. The report states that excluding the impact of AI investments, Tencent's adjusted operating profit for the second quarter of 2026 is expected to grow 14% year-over-year.
Second Quarter 2026 Performance Outlook
Bank of America anticipates Tencent's total revenue for Q2 2026 will increase 8.8% year-over-year, compared to a market consensus of 10%, with adjusted net profit expected to grow 4.7% year-over-year versus a consensus of 9%.
For the gaming business, the report forecasts domestic game revenue to rise 10% year-over-year, primarily driven by incremental revenue recognition from "Delta Force" and the stable performance of "Honor of Kings." International game revenue growth is expected to slow to 9% year-over-year due to a high base effect.
In advertising, Bank of America expects video account ads to continue scaling, driving online advertising revenue up 18% year-over-year, with this segment maintaining relatively high gross margins. For FinTech and Business Services (FBS), FinTech revenue is projected to grow 3% year-over-year, while cloud services are anticipated to accelerate to 25% year-over-year growth, leading to an overall FBS revenue increase of around 8%.
Accelerated AI Investment and Capex Revision
Bank of America estimates Tencent's AI-related operating expenses for Q2 2026 will reach 10.5 billion yuan, up from 8.8 billion yuan in Q1, reflecting continued investment in AI infrastructure and model development.
Regarding capital expenditure, the bank has raised its forecasts for 2026 to 2028 from previous estimates of 150 billion, 180 billion, and 200 billion yuan to 185 billion, 225 billion, and 250 billion yuan, respectively, representing increases of 23% to 25%. This revision directly leads to a significant narrowing of free cash flow forecasts—the 2026 free cash flow estimate is reduced to approximately 67.2 billion yuan, far below the 2025 actual figure of 215.6 billion yuan.
The report also lowers its non-IFRS net profit forecasts for 2027 and 2028, reducing the 2027 estimate from 287 billion yuan to 279.3 billion yuan and the 2028 estimate from 312 billion yuan to 292.7 billion yuan, representing declines of 3% and 6%, respectively.
Positive AI Developments and Market Underestimation
Bank of America believes Tencent's recent improvements in foundational models and the beta launch of WeChat AI agents could shift market sentiment from "pessimistic" to "optimistic."
The report specifically highlights that the market is currently underestimating Tencent's leadership in China's AI agent orchestration layer, where its WorkBuddy holds the top position in user scale. Bank of America views this layer as having significant strategic value, serving as both an entry point for AI model distribution and a source of valuable user-model interaction data.
Regarding the monetization prospects for WeChat AI agents, the bank identifies two core advantages for Tencent: first, its deep AI infrastructure and relatively lightweight WeChat-specific models enable efficient AI service delivery at lower token costs; second, it has the potential to establish mutually beneficial monetization frameworks with ecosystem partners.
Bank of America maintains its target price of HK$780 based on a sum-of-the-parts valuation. Specific valuation assumptions include: online gaming valued at 15 times P/E, value-added services (non-gaming), online advertising, and FinTech all valued at 20 times P/E, cloud and enterprise services valued at 5 times P/S, plus the value of investment holdings and net cash (collectively discounted by 10% to approximately HK$107 per share).
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