Tencent Holdings (00700) has released its first-quarter 2026 results. For 1Q26, the company reported total revenue of RMB 196.5 billion, a year-over-year increase of 9% and a quarter-over-quarter increase of 1%. Non-IFRS operating profit was RMB 75.6 billion, up 9% year-over-year and 9% quarter-over-quarter. Non-IFRS net profit reached RMB 67.9 billion, rising 11% year-over-year and 5% quarter-over-quarter. Considering the company's ongoing significant investments in the AI field, revenue for 2026-2028 is forecasted to be RMB 8,354 billion / RMB 9,238 billion / RMB 10,210 billion, with adjusted net profit estimated at RMB 2,707 billion / RMB 2,975 billion / RMB 3,262 billion (previous estimates were RMB 2,808 billion / RMB 3,124 billion / RMB 3,468 billion). The "Buy" rating is maintained.
Regarding AI development, Tencent is striving to achieve top-tier large language model capabilities in the Chinese domain and is developing localized AI products with distinctive features. On the model front, while the overall scale of the Hunyuan 3.0 model is relatively modest, its core value lies in validating the feasibility of the entire R&D system, computing infrastructure, data architecture, and training methodology, laying a solid foundation for subsequent large-scale development. In terms of applications, the company has optimized and upgraded based on open-source intelligent programs, independently developing professional intelligent office products, with its comprehensive strength ranking at the forefront of the industry.
The core businesses remain solid, with AI acting as an amplifier for business development, empowering revenue growth across multiple dimensions. (1) Value-Added Services (VAS): Revenue recognition was impacted by the later timing of the Spring Festival, with deferred revenue building strength for subsequent quarters. In 1Q26, VAS revenue increased 4% year-over-year to RMB 96.1 billion. This includes domestic games at RMB 45.4 billion (up 6% YoY), international games at RMB 18.8 billion (up 13% YoY), and social networks at RMB 31.9 billion (down 2% YoY). Due to the later Spring Festival holiday, revenue from domestic games and in-game item sales in the domestic mobile market was deferred. In the first quarter, gross billings for domestic games grew over 10% year-over-year, with several evergreen titles (such as Honor of Kings, Peacekeeper Elite, Delta Force) achieving record-high billings this quarter. The new game Locke Kingdom: World also performed well. (2) Advertising: AI empowers content distribution and precise targeting, maintaining strong revenue growth. In 1Q26, advertising revenue grew 20% year-over-year to RMB 38.2 billion. The intelligent advertising product matrix, Tencent Marketing AIM+, empowered approximately 30% of advertisers' marketing service spending and gained widespread adoption among mini-game, short drama, and WeChat Shop advertisers. Video Accounts expanded the parameter scale of its content recommendation model and optimized its algorithm, with total user time spent increasing over 20% year-over-year. (3) FinTech and Business Services (FBS): AI stimulates demand domestically and internationally, with cloud services driving high growth in enterprise services revenue. In 1Q26, FinTech and Business Services revenue increased 9% year-over-year to RMB 59.9 billion. Enterprise services revenue grew 20% year-over-year, benefiting from AI-driven increases in domestic and international demand and a more favorable pricing environment, which boosted cloud service revenue. Thanks to incentives for both brand merchants and seasoned buyers, transaction volume on WeChat Shops maintained rapid year-over-year growth.
The initial impact of AI on the profit structure is becoming evident, with the model and applications refreshing the AI development framework. (1) AI Investment: On one hand, the initially lower gross profit margin (GPM) and higher operating profit margin (OPM) partially reflect the realization of AI's cost-reduction and efficiency-improvement logic. In 1Q26, the overall gross margin increased by 1 percentage point year-over-year to 57%, while the gross margin for the fastest-growing advertising business decreased by 1 percentage point year-over-year to 55%. The adjusted EBITDA margin increased by 1 percentage point year-over-year to 46%. On the other hand, capital expenditure continues to intensify, reflecting a more aggressive stance on AI investment. In 1Q26, capital expenditure increased 16% year-over-year to RMB 31.9 billion, with capital expenditure payments reaching RMB 37.0 billion, primarily allocated to support AI-related investments. (2) AI Development: The company is fully committed to reaching top-tier large language model standards in the Chinese domain and creating localized AI products with distinctive features. Regarding the model, although the overall scale of Hunyuan 3.0 is relatively small, its core value lies in validating the feasibility of the entire R&D system, computing infrastructure, data architecture, and training model, thereby solidifying the foundation for subsequent large-scale development. Hunyuan 3.0 possesses three core advantages: balanced and comprehensive performance, alignment with practical application needs, and outstanding cost-effectiveness. Currently, over 130 internal products have integrated Hunyuan 3.0, and the model has consistently ranked first on overseas professional leaderboards. In terms of applications, based on optimization and upgrades of open-source intelligent programs, the company has independently developed professional intelligent office products, with its comprehensive strength ranking at the industry forefront. In 1Q26, Tencent Cloud's efficiency AI agent solutions achieved rapid growth and healthy retention rates. Measured by daily active users (DAU), WorkBuddy has become the most popular efficiency AI agent service in China.
Investment Recommendation: The core business moat remains intact, with further commercialization potential. The AI strategy is centered around core strengths and holds the potential for a "late-mover advantage." The "Buy" rating is reiterated. Considering the company's continuous significant investments in the AI field, revenue for 2026-2028 is forecasted at RMB 8,354 billion / RMB 9,238 billion / RMB 10,210 billion, with adjusted net profit estimated at RMB 2,707 billion / RMB 2,975 billion / RMB 3,262 billion (previous estimates were RMB 2,808 billion / RMB 3,124 billion / RMB 3,468 billion). The "Buy" rating is maintained.
Risk warnings include potential macroeconomic weakness, intensified industry competition, policy risks, AI ethics and responsibility risks, and the risk of information lag or untimely updates in publicly available data used for research reports.
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