Nomura maintains Buy on Tencent; AI investment weighs on margins in the short term, but long-term strategic value remains favored

Overview

This is a company research report by Nomura on Tencent Holdings 0700.HK. The core view is that Tencent has made positive progress in AI, but it is still too early to declare victory; rising AI investment will pressure 2Q26F margins, leading to a slight cut in earnings forecasts, but medium- to long-term business quality and valuation attractiveness support maintaining the Buy rating.

Core views

Nomura expects Tencent's 2Q26F revenue to rise 10% YoY to CNY203bn, broadly in line with market expectations; non-IFRS net profit is expected to rise 6% YoY to CNY67bn, about 3% below consensus. By segment, online games are expected to grow 10% YoY to CNY65.3bn, including 11% growth in domestic games and 8% growth in overseas games; advertising revenue is expected to grow 18% YoY, driven by Video Accounts advertising; FinTech and Business Services are expected to grow 9% YoY, with enterprise services revenue expected to grow 22% YoY, driven by Tencent Cloud. On AI, HunYuan 3.0, WorkBuddy, and WeChat AI agents reflect Tencent's strategic progress, but investment, competition, computing consumption, and chip constraints will still affect short-term margins.

Analysis framework

The report analyzes Tencent through a combination of 2Q26F earnings preview, revenue breakdown by business, non-IFRS margin assumptions, AI product progress assessment, and the SOTP valuation framework. On earnings, the main focus is on revenue growth, non-IFRS net profit, non-IFRS operating margin, and FY26-FY27 forecast revisions; on valuation, the target price is derived by valuing online games, online advertising, FinTech, cloud business, and investment assets separately and then summing them.

Methodology notes

• Valuation MethodSOTP

  Sum-of-the-parts valuation

  Nomura values Tencent's online games, online advertising, FinTech, cloud business, and investment company equity separately, and sums them to arrive at the HKD727 target price.

• Relative RatingNomura equity research rating system

  Relative benchmark performance rating

  Buy means the analyst expects the stock to outperform the specified benchmark over the next 12 months; in this report, Tencent's benchmark is the Hang Seng Index.

• Earnings ForecastNon-IFRS earnings forecast

  Non-IFRS net profit and operating margin forecast

  The report reflects increased AI investment through lowered margin assumptions and accordingly cuts FY26 and FY27 non-IFRS net profit forecasts.

Asset mapping & comparison

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

• Tencent Holdings 0700.HK

  Core covered name

  Strengths

  Games, advertising, FinTech, cloud, and the WeChat ecosystem form a diversified business foundation, while progress in AI products enhances long-term strategic optionality.

  Weaknesses

  Increased AI investment pressures short-term operating margins, and some AI applications have not yet established a clear leading position.

  Comparison

  The report notes that WorkBuddy faces competition from Alibaba and ByteDance, while Yuanbao still lags behind Doubao, DeepSeek, and Qwen.

  Risks

  High market expectations, aggressive investment, overseas marketing expenses, and disruptive products or business models from competitors.

• WeChat AI agent

  An important application scenario in Tencent's AI strategy

  Strengths

  Can leverage WeChat's closed ecosystem and user base of over 1 billion, which competitors cannot directly enter.

  Weaknesses

  Product performance still needs time to be refined, and full deployment would significantly increase computing resource consumption.

  Comparison

  Compared with external AI platforms, WeChat agents have an ecosystem entry advantage; however, the rollout pace requires patience.

  Risks

  Chip constraints, rising computing costs, and user experience falling short of expectations.

• Yuanbao

  Tencent's general-purpose AI chatbot application

  Strengths

  Can access part of WeChat Official Account articles and Video Accounts content.

  Weaknesses

  The report believes it currently trails ByteDance's Doubao, DeepSeek, and Alibaba's Qwen.

  Comparison

  If WeChat agents become WeChat's default built-in AI assistant, Yuanbao's strategic position may become awkward.

  Risks

  Without exclusive and comprehensive support from WeChat resources, it may be difficult to narrow the gap with competing products.

• Online games business

  One of the main segments in SOTP valuation

  Strengths

  2Q26F revenue is expected to grow 10% YoY, with both domestic and overseas games maintaining growth.

  Weaknesses

  The report does not disclose marginal changes in this segment's profitability.

  Comparison

  Nomura values it at USD282bn using FY26F P/E of 18x.

  Risks

  User growth, regulation, product cycles, and overseas marketing investment may affect performance.

• Online advertising business

  One of the main segments in SOTP valuation

  Strengths

  2Q26F is expected to grow 18% YoY, driven by Video Accounts advertising.

  Weaknesses

  Growth depends on continued delivery of Video Accounts monetization.

  Comparison

  Nomura values it at USD236bn using FY26F P/E of 20x.

  Risks

  Advertising demand fluctuations and platform competition may affect growth.

• Tencent Cloud and enterprise services

  A segment related to AI and enterprise services growth

  Strengths

  Enterprise services revenue is expected to grow 22% YoY, accelerating from 1Q26.

  Weaknesses

  AI-related capex and computing investment may pressure overall margins.

  Comparison

  The cloud business is valued at USD40bn in SOTP using FY26F P/S of 5x.

  Risks

  Cloud market competition, chip constraints, and uncertain returns on AI infrastructure investment.

Key data

• 2Q26F Revenue ForecastCNY203bn, YoY +10%Broadly in line with Bloomberg consensus.
• 2Q26F Non-IFRS Net Profit ForecastCNY67bn, YoY +6%About 3% below the CNY69bn consensus.
• 2Q26F Non-IFRS Operating Margin37.1%Down 0.4 percentage points YoY, slightly below the 37.4% consensus, mainly due to increased AI investment.
• Online Games Revenue ForecastCNY65.3bn, YoY +10%Domestic games are expected to grow 11% YoY, and overseas games are expected to grow 8% YoY.
• Advertising Revenue ForecastYoY +18%Mainly driven by Video Accounts advertising.
• FinTech and Business Services Revenue ForecastYoY +9%Enterprise services revenue is expected to grow 22% YoY, further accelerating from 20% in 1Q26, driven by Tencent Cloud.
• FY26/FY27 Non-IFRS Net Profit Forecast RevisionCut by 2% and 1%, respectivelyReflects lowered margin assumptions due to AI investment.
• Target PriceHKD727Based on SOTP valuation, implying FY27F P/E of 20x versus the current 12.7x.
• Current Share PriceHKD460.20Price date is 2026-07-10.
• Implied Upside+58.0%Disclosed in the report table.
• WorkBuddy Monthly Visits8.85mnAnalysys says that as of March 2026, WorkBuddy is China's most popular desktop AI agent.
• WeChat User BaseMore than 1bnIf fully deployed, WeChat agents may lead to significant computing resource consumption.

Impact & implications

The report's investment implication is positive overall but constrained by short-term earnings pressure. Progress in AI products increases the possibility that Tencent can narrow the gap with AI leaders, and AI agents within the WeChat ecosystem have differentiated advantages; however, AI computing investment, chip constraints, and application competition may continue to pressure margins. Maintaining Buy and a high target price indicates that Nomura believes the valuation upside is sufficient to offset short-term margin pressure.

Risks

• Market expectations are high; if earnings or AI progress fall short of expectations, valuation may come under pressure.
• Aggressive WeChat Pay and overseas marketing spending may affect margins.
• Increased AI investment raises pressure on computing resources, chips, and capex.
• AI products and business models from competitors such as Alibaba, ByteDance, and DeepSeek may create disruptions.
• Desktop AI agents have low user switching costs and low willingness to pay, and the monetization path remains uncertain.
• WeChat agents still require product refinement before full rollout, so it is too early to confirm success in the short term.

What to watch

• Whether 2Q26F revenue, non-IFRS net profit, and operating margin meet expectations.
• The actual impact of AI investment on FY26-FY27 margins and capex.
• Whether developer feedback on HunYuan 3.0 can translate into ecosystem and monetization outcomes.
• Whether WorkBuddy can maintain leadership in the desktop AI agent market and build an enterprise user advantage.
• The pilot progress, formal launch pace, and computing consumption of WeChat AI agents.
• Whether Yuanbao can narrow the gap with competitors such as Doubao, DeepSeek, and Qwen.
• Whether growth in Video Accounts advertising, Tencent Cloud, and enterprise services revenue can be sustained.