Nomura maintains Buy on Tencent: AI spending pressures near-term margins, but WeChat ecosystem and SOTP valuation still support upside

Overview

This is a Nomura company research and rating-upgrade report on Tencent Holdings. The report focuses on Tencent's 2Q26F outlook, arguing that revenue will be broadly in line with market expectations, but rising AI-related spending will make non-IFRS operating margin and net profit slightly below consensus. Despite near-term margin pressure, Nomura maintains a Buy rating and HKD727 target price for Tencent.

Core views

The core view is that Tencent's core businesses remain resilient, with 2Q26F revenue expected to grow 10% year on year; games, advertising, fintech, and enterprise services all have growth support; AI investment may dilute margins in the short term, but Hy 3.0, WorkBuddy, and WeChat Agent reflect long-term strategic value. Nomura believes Tencent can narrow the gap with AI leaders, but it is still too early to claim AI applications are already winning.

Analysis framework

The report combines earnings preview, segment-level revenue decomposition, non-IFRS margin forecasting, earnings forecast revisions, and sum-of-the-parts (SOTP) valuation. In valuation, it assigns value separately to online games, online advertising, fintech, cloud, and investee companies, and uses the Hang Seng Index as the stock benchmark.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  Nomura estimates the values of Tencent's online gaming, online advertising, fintech, cloud, and investee company segments separately, resulting in a target price of HKD727.

• Valuation methodsmultiple_analysis

  Price-to-earnings and price-to-sales multiples

  The report values online gaming at an FY26F P/E of 18x, online advertising at an FY26F P/E of 20x, fintech at an FY26F P/E of 15x, and cloud business at an FY26F P/S of 5x.

• earningsnon_ifrs_profit_forecast

  Non-IFRS net profit and operating margin forecasting

  The report uses non-IFRS net profit and non-IFRS operating margin to assess Tencent's core earnings quality, incorporating margin pressure from AI investment into the forecasts.

Asset mapping & comparison

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

• Tencent Holdings / 00700.HK

  Research coverage stock

  Strengths

  WeChat has more than 1 billion users, online gaming, advertising, fintech, and enterprise services are still growing; WeChat Agent has ecosystem moats; and SOTP valuation still implies substantial upside.

  Weaknesses

  Higher AI spending is pushing down non-IFRS operating margin; Yuanbao still trails peer chatbots such as Doubao, DeepSeek, and Qwen; chip and compute constraints could limit full WeChat Agent rollout.

  Comparison

  The report uses the Hang Seng Index as the stock benchmark and notes that desktop AI Agent competitors including Alibaba and ByteDance have already launched products.

  Risks

  High market expectations, aggressive spending on WeChat Pay and overseas marketing, and disruptive products or business models from peers may hinder achieving the target price.

• Hang Seng Index

  Valuation and rating benchmark

  Strengths

  Serves as a relative performance benchmark for Tencent shares.

  Weaknesses

  The report does not provide a separate fundamental analysis of the index.

  Comparison

  A Buy rating implies the analyst expects Tencent to outperform this benchmark over the next 12 months.

  Risks

  Macro and market trends may affect realization of the target price.

Key data

• 2Q26F Revenue ForecastCNY203bn, up 10% year on yearBroadly in line with Bloomberg consensus.
• 2Q26F Non-IFRS Net Profit ForecastCNY67bn, up 6% year on yearAbout 3% below Bloomberg consensus of CNY69bn.
• 2Q26F Non-IFRS Operating Margin Forecast37.1%Down 0.4 percentage points year on year, versus Bloomberg consensus of 37.4%, driven by higher AI investment.
• Online Gaming Revenue ForecastCNY65.3bn, up 10% year on yearDomestic gaming is expected to grow 11% year on year, while overseas gaming is expected to grow 8% year on year.
• Advertising Revenue ForecastUp 18% year on yearMainly driven by WeChat Video Channel advertising.
• FinTech and Enterprise Services Revenue ForecastUp 9% year on yearEnterprise services revenue is expected to rise 22% year on year, accelerating from 20% in 1Q26, supported by Tencent Cloud.
• Earnings Forecast RevisionFY26/FY27 non-IFRS net profit reduced by 2%/1%Reflects lower margin assumptions under higher AI investment.
• Target PriceHKD727Based on SOTP valuation, implying an FY27F P/E of 20x versus the current 12.7x.
• Current Price and Implied UpsideHKD460.20; +58.0%Closing price date is 2026-07-10.
• WorkBuddy Monthly Visits8.85mnAnalysys stated that as of March 2026 it was China's most popular desktop AI Agent.

Impact & implications

From an investment perspective, the report says the market should watch two main themes: first, AI investment is creating short-term margin pressure that may restrain near-term earnings expectations; second, Tencent may still build differentiated advantage in AI commercialization through WeChat, cloud, and content distribution capabilities. Maintaining a Buy reflects Nomura's view that the current valuation does not fully reflect these long-term opportunities.

Risks

• AI investment continuing to rise, further pressuring margins.
• Full deployment of WeChat Agent may significantly increase compute usage and face chip constraints.
• Desktop AI Agent competition is intense, user switching costs are low, willingness to pay is limited, and no clear winner in the enterprise endpoint has emerged.
• If Yuanbao cannot gain exclusive and full support from WeChat resources, it may fail to close the gap with competing chatbots.
• High market expectations, aggressive spending on WeChat Pay and overseas marketing, and disruptive products or business models from competitors may hinder target price achievement.

What to watch

• Whether 2Q26F actual revenue, non-IFRS net profit, and non-IFRS operating margin align with Nomura forecasts.
• The pace of AI-related capex and opex, and the impact on FY26/FY27 margins.
• Whether developer feedback on Hy 3.0 can translate into broader adoption and commercial monetization.
• WorkBuddy retention, monetization, and competitive positioning among white-collar, student, and enterprise users.
• Progress of WeChat Agent pilots, timeline for full rollout, compute consumption, and product experience.
• Growth in Video Channel advertising, Tencent Cloud revenue momentum, and recovery in fintech and enterprise services.