UBS maintains a Buy view on Tencent Holdings, believing that AI investment will not change the resilience of earnings in 2026

Overview

This is a 1Q26 earnings preview on Tencent Holdings (0700.HK) by UBS. The core view is that even as Tencent increases investment in AI products in 2026E, gaming, advertising, Channels, high-margin in-house games, and earnings normalization can still support solid double-digit profit growth. UBS reiterates a positive view, arguing that the market is underestimating Tencent across AI investment, game growth, advertising resilience, and valuation.

Core views

UBS expects Tencent's 1Q26 revenue to grow 11% YoY and adjusted net profit to rise 12% YoY to RMB 692 hundred million. By business, domestic games are expected to grow 13%, international games 16%, advertising 18%, and FinTech and Business Services 10%. Gross margin is expected to reach 57.5%, up 1.6 percentage points YoY, driven by a higher mix of high-margin in-house games, Channels, and e-commerce technical service fees. The report emphasizes that at least RMB 180 hundred million of new AI product investment in 2026E will increase expenses, but roughly RMB 250 hundred million of gross-margin improvement and earnings-normalization upside can provide a buffer, so the impact of AI investment on earnings is manageable.

Analysis framework

The report uses an earnings-preview and segment-breakdown approach, making forecasts across games, advertising, FinTech and Business Services, gross margin, and operating profit, while combining AI investment, HY3.0 large-model launch, new product rollout, game grossing rankings, advertising closed-loop conversion, and valuation multiples to form the investment view. On valuation, the report states that the target price is based on a sum-of-the-parts approach and compares Tencent's current roughly 14x P/E with global gaming and advertising platforms.

Methodology notes

• valuation methodsum of the parts

  sum of the parts

  The report explicitly states that the target price is based on a sum-of-the-parts approach, which is suitable for a diversified internet company like Tencent with businesses spanning games, social, advertising, fintech, cloud, and investments.

• earnings forecastsegment revenue and profit breakdown

  segment forecast

  The report separately forecasts domestic games, international games, advertising, FinTech and Business Services, gross margin, and adjusted operating profit to judge the quality of 1Q26 earnings growth.

• short-term factor assessmentQuantitative Research Review

  short-term factor assessment

  UBS discloses that its Quantitative Research Review reflects analysts' quantitative assessment of the probability of certain short-term factors occurring; its time frame differs from the 12-month stock rating in the main text.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Tencent Holdings (0700.HK)

  The research target; a Hong Kong-listed internet leader covering games, social, advertising, FinTech, cloud, and digital content.

  Strengths

  Owns one of China's largest online communities, with a strong Weixin/WeChat ecosystem; domestic evergreen games and new-title pipeline support growth; Channels, search, and closed-loop advertising improve ad inventory and conversion; high-margin in-house games and Channels help margin improvement; AI teams, HY3.0, QClaw, Workbuddy, and Yuanbao show the company is taking a more proactive approach to AI.

  Weaknesses

  AI new product investment and promotion activities will increase expenses; international game growth has slowed from prior highs; FinTech and Business Services remain affected by macro uncertainty in offline consumption; some earnings improvement depends on normalization of other income and associate contributions.

  Comparison

  The report believes Tencent's current roughly 14x P/E is at a low since 2021 and attractive relative to global gaming and advertising platforms; UBS forecasts 15% growth for domestic games in 2026E, above the market consensus of 11%.

  Risks

  Intensifying competition in the internet and gaming industries; execution risk for new businesses and AI products; uncertainty around the integration of investee companies and businesses; higher traffic acquisition, content, and brand promotion costs; rising IT system maintenance and technology spending; execution, compliance, and localization risks in overseas expansion; intellectual property infringement or related dispute risks; turnover risk among key management; regulatory policy change risks; AI investment, Yuanbao promotion activities, and a weak macro backdrop may pressure near-term margins.

Key data

• 12-month ratingBuyThe report cover discloses a 12-month rating of Buy.
• Target priceHK$780.0012m price target HK$780.00.
• Current priceHK$508.00Price date is April 8, 2026.
• Implied upsideabout 53.5%Calculated from the target price of HK$780.00 and the current price of HK$508.00.
• 1Q26 revenue forecast+11% YoYUBS expects Tencent's 1Q26 revenue to grow 11% YoY.
• 1Q26 adjusted net profit forecastRMB 692 hundred million, +12% YoYThe report expects adjusted NP to grow 12% YoY.
• 1Q26 adjusted operating profit forecastRMB 766 hundred million, +11% YoYDespite AI investment and the Yuanbao Spring Festival red packet campaign, growth is still expected to be 11% YoY.
• 1Q26 gross margin forecast57.5%, up 1.6 percentage points YoYGross profit is expected to grow 15% YoY.
• Domestic games revenue forecast+13% YoYAbove the market consensus of +11% YoY.
• International games revenue forecast+16% YoYAffected by slower growth at Supercell and base normalization after Kuro was consolidated in December 2024.
• Advertising revenue forecast+18% YoYDriven by WeChat Channels, search ad inventory, AIM+, and AI ad technologies.
• FinTech and Business Services revenue forecast+10% YoYCloud growth acceleration offsets macro uncertainty in offline consumption.
• New AI product investment in 2026ERMB 180 hundred million or moreThe report believes the impact of this investment on earnings is manageable.
• Potential earnings bufferabout RMB 250 hundred million / 9% incremental profitFrom about RMB 150 hundred million in after-tax incremental gross-margin improvement and about RMB 100 hundred million from earnings normalization.
• 2026E adjusted EPS growth forecast+12%UBS believes this growth rate can still be achieved even after increasing AI investment.
• Valuation multipleabout 14x P/EThe report says this is a low level since 2021 and views the valuation as attractive.

Impact & implications

The report is positive for Tencent's share price: if 1Q26 results confirm that games and advertising continue to outperform the industry, while AI investment does not materially erode margins, the market may re-rate Tencent's earnings resilience and the moat of the Weixin ecosystem. UBS believes the current valuation does not fully reflect Tencent's intrinsic ecosystem value or the long-term potential from AI products and advertising technology upgrades.

Risks

• The competitive landscape in the internet and gaming industries may evolve and intensify.
• Execution of new businesses and AI products may fall short of expectations.
• Integration of investee companies and businesses carries uncertainty.
• Traffic acquisition, content, and brand promotion costs may rise.
• IT system maintenance and technology spending may increase.
• Expansion into overseas markets may bring execution, compliance, and localization risks.
• Risk of intellectual property infringement or related disputes.
• Risk of turnover among key management.
• Risk of regulatory policy changes.
• AI investment, Yuanbao promotion activities, and macro weakness may pressure near-term profit margins.

What to watch

• Product iterations and market feedback after the HY3.0 large model is expected to launch in mid-April.
• Whether AI features, QClaw, Workbuddy, and Yuanbao can generate user growth and a monetization path.
• The margin trajectory after AI spending, especially whether gross margin improvement can continue to offset new expenses.
• The performance of new games such as The World of Rock Kingdom and Honor of Kings: World, as well as domestic game grossing rankings.
• WeChat Channels and search ad inventory, ad load rate, AIM+ advertiser expansion, and the impact of AI ad technologies on eCPM.
• Changes in the share of closed-loop advertising driven by Mini Shops and Channels, as well as CTR and conversion rates.
• Whether cloud growth continues to accelerate and offset the weakness in offline consumption for FBS.
• Whether other income, associate contributions, and PDD Temu earnings improvement normalize as expected.