Haitong International: Downgraded Tencent Holdings Limited's target price to HKD 480, performance roughly in line with expectations

According to the Zhitong Finance APP, Haitong International released a research report stating that it has lowered its earnings per share forecast for Tencent Holdings (00700) for 2026/2027 by 3%/10% to reflect the current burden of forward-looking AI investments, and has reduced the target price by 9%, from HKD 525 to HKD 480. It maintains a positive outlook on Tencent's long-term prospects and reiterates the "Outperform" rating.

In the second quarter of 2026, Tencent's revenue was RMB 204.8 billion, a year-on-year increase of 11%, roughly in line with market expectations. Gross profit was RMB 118.4 billion, with a gross margin of 57.8%, exceeding expectations by 2%; adjusted operating profit was RMB 75.6 billion, with an operating margin of 36.9%, and adjusted net profit was RMB 68.4 billion, with a net margin of 33.4%, both roughly in line with expectations.

The report indicated that due to accelerated investment in AI, Tencent's free cash flow turned negative in the second quarter. Although AI investment is expected to rise, the annualized run rate of capital expenditures (approximately RMB 220 billion annualized) still surprised the firm. While it is difficult to quantify the impact of rising capital expenditures specifically, the firm gained insights from considering the profit differences before and after AI investments. It estimates that AI investments in 2026 will have an impact of nearly RMB 50 billion through cost of sales and operating expenses. Due to the different characteristics of core and AI businesses, the firm shifted from a price-to-earnings ratio approach to a sum-of-the-parts method to better reflect the value of core business and the potential value of AI