Goldman Sachs: Tencent, NetEase, and Kuaishou are the core of mainland gaming and entertainment stocks

Goldman Sachs published a report stating that the Chinese gaming and entertainment sector experienced a broad increase in stock prices in 2025, with mid to large-cap stocks rising by 50% to 80% (compared to the Hang Seng China Enterprises Index's 26%), and continued strong performance into early 2026, with some stocks rising by as much as 30% (compared to related indices of about 3-5%). The bank believes that this increase is driven half by valuation expansion and half by earnings per share growth. Looking ahead to 2026, the bank has framed the key themes and points of debate in the sector, believing that future risk-reward remains attractive but is more inclined towards "alpha" driven. The bank prefers companies with new growth potential (such as the penetration of artificial intelligence applications and accelerated overseas expansion), as well as companies that still have room for compound growth/profit expansion in the context of intensified competition, especially in light of competitive concerns brought by ByteDance.

The bank pointed out that (1) competition from ByteDance has become a core concern for investors in certain growth tracks, but the bank emphasizes that differences between tracks are significant: short video/game platforms are rapidly rising, while music streaming is an important point of debate. The bank believes that Tencent Music (TME.US) has a differentiated position in terms of ARPU and non-subscription revenue growth.

(2) Accelerated overseas market expansion: Chinese game publishers and content platforms (represented by Tencent (00700.HK) and NetEase (09999.HK)) are speeding up their overseas efforts. The advantages of Chinese game manufacturers lie in capital and talent density, outstanding technical capabilities, and efficient continuous content upgrades, which are driving their global market share from the current level of about 15% to further increase.

(3) In terms of the empowerment and disruption of artificial intelligence applications, Goldman Sachs stated that AI is not only beginning to reduce production and labor costs but also expanding the space for improving efficiency and increasing revenue. Especially in the gaming and advertising sectors, AI is bringing revenue increases and efficiency improvements. With the continuous upgrading of multimodal large models, more application scenarios and opportunities for enterprise adoption will continue to emerge; the bank expects that by 2028, the total addressable market (TAM) for AI video generation tools is expected to achieve a tenfold expansion.

Goldman Sachs' core buy stocks include Tencent, NetEase, Kuaishou, Bilibili (BILI.US), and Tencent Music. The bank believes that Tencent's core business (gaming + advertising) will continue to maintain low to mid-double-digit growth annually, mainly benefiting from the sustainability of evergreen games, key product pipelines, and the advertising ecosystem's support in monetization and artificial intelligence. The bank continues to view Tencent as an important agent for artificial intelligence applications and a core holding for investors. The bank maintains a "Buy" rating on Tencent, lowering the target price from 770 yuan to 752 yuan