UBS reiterates buy on Tencent Holdings, with core-business cash flow supporting AI investment

Overview

This is a UBS company research report on Tencent Holdings' 2Q26 earnings outlook. The core conclusion is that Tencent's core businesses, such as gaming and advertising, remain resilient and can provide funding for AI model, AI product, and compute investments. UBS expects 2Q26 revenue to grow 9% year-on-year and adjusted net profit to grow 4% year-on-year to RMB 66 billion, and reiterates a Buy rating.

Core views

The report argues Tencent's investment thesis has two parts: first, gaming, advertising, and fintech remain steady, with domestic game revenues and video-account ad monetization supporting growth; second, while AI spending will increase capex, depreciation, and operating costs, Tencent has a capital base, user data, use cases, and model capability with HY3.0, giving it a long-term chance to benefit as AI moves into productization and commercialization. The short-term constraint is that AI contribution is spread across multiple product lines and lacks separate disclosed metrics that can be independently valued, so the market may still price it on low-single-digit EPS growth and overall P/E.

Analysis framework

UBS uses a segment forecasting and valuation approach, separately assessing revenue growth, gross margin and operating profit changes for gaming, advertising, fintech, and cloud, while incorporating the impact of AI capex, depreciation, and operating expenses on profitability. On valuation, the report states that the target price is based on a sum-of-the-parts method, while also referencing 2026E P/E, investment portfolio value, and forecast stock returns.

Methodology notes

• Valuation methodssum_of_the_parts

  Sum-of-the-parts valuation

  The report explicitly states the target price is based on sum of the parts, valuing Tencent's core businesses, investment portfolio, and other assets on a segment basis.

• forecastsegment_forecast

  Segment forecasting

  The report forecasts domestic gaming, international gaming, advertising, fintech, and cloud separately, and incorporates AI spending impacts on gross margin, operating profit, and EPS into the model.

• short_term_assessmentQuantitative Research Review

  Short-term factor questionnaire assessment

  UBS disclosed a short-term quantitative research questionnaire on industry structure, regulatory environment, recent stock trends, and risks around the next EPS update, with a time horizon different from the 12-month equity rating.

Asset mapping & comparison

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

• Tencent Holdings (0700.HK)

  Core coverage name

  Strengths

  Core gaming and advertising businesses are resilient, with strong free cash flow and a solid balance sheet, plus WeChat ecosystem, proprietary user data, HY3.0 model, and AI product progress such as WorkBuddy.

  Weaknesses

  AI investment lifts capex, depreciation, and operating expenses; AI contribution is distributed across multiple business lines, and short-term quantifiable AI revenue metrics are less clear than some peers.

  Comparison

  Compared with AI peers that separately disclose MaaS ARR, GPU sales, or cloud metrics, Tencent's AI assets are more embedded, so the market may continue to price it using overall P/E and EPS growth.

  Risks

  EPS downgrades, domestic game base-pressure risk, sustainability of advertising growth, AI commercialization shortfall, regulatory and competitive risks.

Key data

• 2Q26 Revenue Growth Forecast+9% YoYUBS expects Tencent's 2Q26 revenue to grow 9% year-on-year.
• 2Q26 Adjusted Net Profit ForecastRMB 66 billion, +4% YoYThe report expects adjusted net profit to grow 4% year-on-year.
• Domestic Games Growth Forecast+10% YoYSupported by evergreen titles such as Honor of Kings, Peace Elite, and Delta Force, along with the newly launched Roco Kingdom.
• International Games Growth Forecast+8% YoYGrowth is expected to slow from 13% in 1Q26 due to the high base from including Supercell and Kuro.
• Advertising Growth Forecast+18% YoYHigher video-account traffic and ad load rates, higher eCPM ad formats, and ad-tech upgrades support the growth.
• Fintech and Enterprise Services Growth Forecast+8% YoYPayment growth is expected to moderate due to weak macro conditions, while cloud growth is supported by improving chip supply.
• 2Q26 Gross Margin Forecast57.9%With business mix moving toward higher-margin segments, UBS expects gross margin to grow 11% year-on-year.
• Adjusted Operating Profit ForecastRMB 74 billion, +7% YoYRising AI operating expenses and depreciation offset part of the core-business growth.
• 2026E Capital Expenditure ForecastRMB 170 billionHigher than RMB 32 billion in 1Q26 and RMB 87 billion in 2025; expected to increase further in the second half as domestic chip supply constraints ease.
• Target PriceHK$780.0012-month target price.
• Current PriceHK$469.60Price on 2026-07-09.
• Forecast Total Return67.5%Includes a forecast price upside of 66.1% and a forecast dividend yield of 1.4%.

Impact & implications

The report's investment implication is broadly positive: Tencent can use high-cash-flow businesses like gaming and advertising to fund AI investment; if the AI industry shifts from model leadership to product and monetization, Tencent's advantages in user scale, data, use cases, and WeChat access could become more visible. But in the near term, markets may demand clearer AI revenue, cloud, or MaaS metrics, so rising AI spend may initially show up as EPS pressure rather than valuation re-rating.

Risks

• The competitive landscape shifts and intensifies.
• New-business execution risk.
• Risks from portfolio companies and business integration.
• Higher traffic, content, and brand promotion costs.
• IT system maintenance costs and operational risks.
• International expansion risk.
• Intellectual property infringement risk.
• Key management turnover risk.
• Regulatory risk.
• A significant increase in 2026E AI spending may bring EPS revision risk.
• Domestic gaming may face growth pressure in H2 due to a high base and no major new game launches.

What to watch

• Actual growth rates of gaming, advertising, fintech, and cloud in 2Q26 results.
• The pace of increases in AI capex, depreciation, and operating expenses.
• User feedback and model capability progress after HY4 release.
• Scale-up and commercialization of AI products such as WorkBuddy and WeChat AI agents.
• Whether advertising growth remains supported by video-account ad load rate, high-eCPM ad formats, and AIM+ automated campaign penetration.
• Impact of improved domestic chip supply on cloud and AI compute expansion.
• Whether the market shifts from focusing solely on EPS growth to accepting the SOTP framework and AI asset re-rating.