CICC: Maintains Tencent Holdings "Outperform Industry" Rating with a Target Price of HKD 700

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that it basically maintains its revenue and profit forecasts for Tencent Holdings (00700) for 2025/2026. It maintains an "outperform industry" rating and a target price of HKD 700, corresponding to 23x/20x 2025e/2026e Non-IFRS P/E, which has a 9.5% upside potential compared to the current stock price. Currently, it is trading at 21x/18x 2025e/2026e Non-IFRS P/E. The firm updated its tracking of Tencent, believing that the company's gaming business remains relatively strong, while advertising, finance, and enterprise services are robust drivers, with overall high-quality growth continuing.

CICC's main points are as follows:

The firm expects strong gaming growth in 3Q25

In terms of domestic gaming, the firm believes that domestic game revenue can still maintain a rapid growth rate in 3Q25 (up 11% year-on-year), especially in the shooting game sector where Tencent has recently reported good news— in August, the DAU of "Peace Elite" Oasis Mode exceeded 33 million, in September, the DAU of "Delta Force" exceeded 30 million, and in October, the DAU of "Dark Zone Breakout" broke 10 million. In terms of overseas gaming, due to the high-quality games from Supercell's subsidiary having good revenue realization (such as "Clash Royale" being revitalized) and a longer revenue amortization cycle, the firm expects Tencent's overseas gaming revenue to grow by 25% year-on-year in 3Q25. Looking ahead, the firm believes that potential high-quality new games such as "Honor of Kings World" can be further monitored.

Rapid growth in advertising, payment maintains recovery trend

In terms of advertising, factors such as AI advertising efficiency improvements, increased ad loading on video accounts, mini-programs, and search functions are continuously contributing to advertising growth and gross margin improvement. The firm expects a 19% year-on-year growth in advertising in 3Q25. In terms of financial services, the firm believes that besides the further recovery of commercial payment revenue in 3Q25, high-margin derivative businesses such as lending and wealth management may continue to show a fast revenue growth trend (the firm expects a combined year-on-year growth of over 20% for both in 3Q25); in terms of enterprise services, the increase in cloud computing demand brought by AI, along with resource optimization in the cloud itself and the growth of WeChat e-commerce technical service fees, may sustain a 20% year-on-year growth in enterprise service revenue in 3Q25. The firm expects a year-on-year growth of 11% in financial and enterprise service revenue in 3Q25.

Good balance between AI spending and profit release

Tencent's AI model layer has made recent progress, such as the mixed Yuan Image 3.0, with Tencent stating that the model's performance can match leading closed-source models in the industry. The firm believes that although Tencent's AI investment has not yet reached the commercialization cycle, the AI progress is good, and in the future, while there will still be depreciation expenses due to capital expenditures, Tencent continues to maintain high-quality growth in other businesses, leading to gross margin improvement. Considering all these factors, the firm expects an 18.5% year-on-year growth in adjusted operating profit and a 12% year-on-year growth in adjusted net profit in 3Q25.

Risk Warning: Macroeconomic uncertainty; U.S. regulatory factors; costs or expense ratios higher than expected