Nomura raises Tencent's target price to 775 yuan, expects chip shortages may hinder cloud business development

Nomura published a research report stating that Tencent (00700.HK) had a solid overall performance in the third quarter, but management acknowledged during the conference call that it is currently facing supply constraints for AI chips. As a result, it has lowered its capital expenditure guidance for the fiscal year 2025, expecting it to be below the previously guided "low double-digit percentage of annual revenue," but still anticipated to be higher than last year's level of RMB 77 billion.

Nomura believes that the chip shortage will continue to have a significant impact on Tencent's cloud business, hindering its business development, as computing power is one of the highest-demand services for enterprise users deploying large language models. However, management expects that its two most valuable AI assets, "Yuanbao" and "Hunyuan Large Model," have not been affected by the supply shortage.

The firm believes that compared to peers ByteDance and Alibaba-W (09988.HK), Tencent's investments in AI infrastructure and large language models over the past few years may have been insufficient. It maintains a "Buy" rating, raising the target price from RMB 757 to RMB 775