JPMorgan Maintains Tencent's Overweight Rating with Target Price of HKD 690, Focused on AI Investment's Revenue Conversion

On August 13, JPMorgan maintained its "Overweight" rating on Tencent Holdings (0700.HK) with a target price of HKD 690 in its latest research report. The report suggests that Tencent is currently in the AI investment cycle for 2026 to 2027, with 2026 potentially being a low point for profit growth, expecting an adjusted EPS growth rate of about 2%. However, as AI monetization gradually offsets investment costs, profit growth is expected to recover to a range of 10% to 15% in 2027.

The report noted that Tencent's revenue in the second quarter grew by 11% year-on-year to RMB 204.8 billion, with non-IFRS net profit increasing by 9% year-on-year to RMB 68.4 billion. Among these, marketing services revenue grew by 22% year-on-year, domestic gaming revenue increased by 17%, and fintech and enterprise services rose by 9%. After a price increase in May, the cloud business's growth rate rebounded to just over 20%.

JPMorgan indicated that the market may currently interpret Tencent's flat sequential profits and negative free cash flow as signals of stagnation or cash consumption. However, it believes that Tencent's core business still has the capacity to support AI investments. The report estimates that Tencent's quarterly investment in new AI products such as Mix Yuan, Yuan Bao, CodeBuddy, WorkBuddy, and Xiao Wei was approximately RMB 10.5 billion in the second quarter, up from about RMB 8.8 billion in the first quarter.

The report also mentioned that Tencent's apparent free cash flow in the second quarter was negative RMB 13.8 billion, but if excluding the prepayment for computing power, the adjusted free cash flow was positive at RMB 37.6 billion. JPMorgan believes that Tencent can still fund its current AI investment cycle through cash flow from its core business and by disposing of part of its over RMB 700 billion equity investment portfolio.

Regarding future catalysts, JPMorgan is particularly focused on the release of Mix Yuan within four years, the deferred revenue recognition of WorkBuddy's paid tier, and the testing and potential commercialization of WeChat Agent "Xiao Wei." The report states that Xiao Wei, relying on WeChat's social relationships, merchant network, payment, and mini-program ecosystem, could become a key variable for the market to reassess Tencent's AI value if user, GMV, or monetization data is disclosed later.

On the risk side, JPMorgan noted that if Tencent's advertising growth in the third quarter falls below the high teens, quarterly AI investment rises to over RMB 12 billion to 13 billion without clear revenue offsets, or if Mix Yuan is delayed until after 2026, its judgment on Tencent's AI investment returns will become more cautious.