To The Moon

On August 13, shares of Tencent Holdings fell 4% after earnings, leading a broader retreat among internet stocks. The Hong Kong-listed Internet ETF HuaBao (513770) closed down 1.88% on the day, marking its third consecutive decline. In response, Feng Chencheng, fund manager of the Hong Kong Internet ETF HuaBao (513770), provided an in-depth analysis. He noted that for major firms like Tencent, which have a high proportion of AI applications, short-term valuation changes may still be constrained by market expectations for the AI investment cycle and monetization pace. As AI monetization scales up, the industry's profit pool is gradually shifting from infrastructure to applications and services, providing a foundation for long-term investment in the internet sector. A moment of divergence may be precisely the opportunity for long-term investors to buy at lower prices.

How did Tencent perform this quarter? Feng Chencheng pointed out that Tencent's second-quarter revenue and profit growth met market consensus expectations. The core business demonstrated operational resilience. The company separately disclosed that after excluding AI-related investments, second-quarter adjusted net profit grew 19% year-over-year, outpacing the first-quarter growth rate of 17%. Analyzing the specifics, although overseas gaming revenue slowed to 4% growth due to a high base from the same period last year, domestic gaming growth accelerated to 17%. Advertising revenue growth picked up to 22%, with a quarter-over-quarter acceleration. Video account advertising continued to release its potential, with video account traffic still growing and loading rates remaining low. This sustainable growth driver is expected to support continued high growth in the third quarter. Regarding the closely watched cloud business, second-quarter cloud revenue growth accelerated to over 20%. External cloud business may see its year-over-year growth rate accelerate as chip capacity expands in the second half of the year and into 2027. This also provides profit and downside protection for Tencent's AI infrastructure investments.

The key focus of the earnings report was second-quarter CapEx of 52.8 billion yuan, which exceeded expectations. This resulted in free cash flow turning negative to -13.8 billion yuan in the second quarter, the first time it has turned negative in many years and about two quarters earlier than market expectations. This may be the main reason for short-term market sentiment disruption. Looking ahead to future earnings expectations, Feng Chencheng stated that although no clear guidance was provided, Tencent indicated that second-half CapEx would be significantly higher than the first half. The first-half CapEx of 84.7 billion yuan has already surpassed the total for the full year 2025, and the full-year figure is expected to be above 200 billion yuan (compared to a previous market estimate of 170 billion yuan). The pressure of CapEx on profit margins may just be beginning. The acceleration of AI capital expenditure could lead to further downward revisions of market EPS forecasts for the second half of 2026 and 2027.

All-in on AI for Long-Term Value

The release of the Hunyuan 3 model has brought Tencent back to the table in the large model space and received positive user feedback. The anticipated release of the larger-parameter Hunyuan 4 model is expected to accelerate. The market is re-evaluating Tencent's position in the AI era. WorkBuddy and CodeBuddy are Tencent's most compelling AI application progress to date. According to data from Analysys cited in the earnings presentation, these two products ranked first in China for monthly interaction counts among PC-based AI-native office intelligences in June, reaching 27.5 million interactions. The gross profit from WorkBuddy's paying users is already comparable to Tencent Cloud's overall gross profit, and its paying user base is expanding. As domestic model capabilities catch up, users are noticeably finding WorkBuddy more convenient and effective. Market attention on WorkBuddy is continuously rising. If the business model is successfully proven and maintains its lead, it could grow into a core product. WeChat's mini-apps also have considerable potential for interaction and transactions between agents, while simultaneously improving the user experience on WeChat.

Feng Chencheng pointed out that for a company known for its financial prudence, in the current context of accelerating mid-to-downstream AI industry development, models and products are racing to establish competitive advantages. Lagging in computing power means lagging in product capabilities. The urgency of AI investment is self-evident from the numbers. Tencent has not given full-year profit guidance, only indicating it expects growth compared to last year's 259.6 billion yuan. If one assumes no growth, the current market cap corresponds to a 14x PE. How long profit will remain flat is something to watch. Tencent is currently in a conflicting state of improving long-term narrative sentiment and facing short-term profit pressure. By shedding the "AI loser" label, the high level of AI investment and limited visibility of AI application monetization mean there is a lack of short-term valuation catalysts. Strategically, Tencent is using its current cash flow to reinvest in a new moat that forms a second growth curve. The current market divergence still focuses on the visibility of CapEx (one-time or normalized) and expectations for related monetization.

Feng Chencheng believes the market is still focused on the costs of AI while underestimating its significant long-term value creation potential. This includes WeChat's unparalleled distribution capabilities, its vast proprietary data ecosystem, and its highly integrated platform, which provides a unique closed-loop environment for AI deployment, user interaction, and monetization. If the transition from a pure AI investment period to a period of AI product validation and monetization occurs, and the valuation logic shifts from "CapEx dragging down EPS" to "core business + AI option," the company could see a valuation recovery. Is a moment of divergence precisely an opportunity for positioning?

This year, globally, companies with AI-driven profit/cash flow visibility have been favored by the market. In the first half, it was AI hardware suppliers and large model developers. More recently, it has been cloud vendors, with the cloud pricing environment improving significantly compared to the past. In the context of the global AI industry placing greater emphasis on commercial viability, there is increasing sensitivity to the sustainability of CapEx ROI, technological competitiveness, AI revenue growth, and operating margins. For major firms like Tencent, with a high concentration of AI applications, short-term valuation changes may still be constrained by market expectations for the AI investment cycle and the pace of monetization. Against a backdrop of a lack of clarity on the ultimate profitability impact of large-scale AI-related spending, news and data on new product adoption rates, token consumption, and revenue growth significantly impact short-term market sentiment. From a long-term perspective, Feng Chencheng believes that as AI monetization scales up, the industry's profit pool will gradually shift from infrastructure to applications and services. This provides a foundation for long-term investment in the internet sector. Compared to Meituan, which has seen a clear rebound in EPS, and Alibaba, where AI business ROI is most direct, Tencent's current moment of divergence, where fundamentals are a waiting game, might be precisely the opportunity for long-term investors to enter at lower prices and build positions.

Related ETFs

The Hong Kong Internet ETF HuaBao (513770) and its linked funds (Class A: 017125; Class C: 017126) passively track the CSI Hong Kong Stock Connect Internet Index. The top ten heavyweight stocks include tech giants and AI application companies across various fields such as Alibaba-W, Tencent Holdings, Meituan-W, and Xiaomi Group-W, accounting for over 70% of the total weight. It boasts significant leadership advantages, supports intraday T+0 trading, and offers good liquidity, making it an efficient tool for positioning for a value revaluation of Hong Kong-listed internet leaders amidst the AI transformation.