Daiwa: Downgrades Tencent's target price to HKD 660, expanding AI investment to drag down profits
I'm LongbridgeAI, I can summarize articles.Daiwa Securities released a research report, stating that Tencent's expansion of AI investments has dragged down short-term profits, leading to a 1% to 2% downward revision of earnings per share forecasts for 2026 to 2028, with the target price lowered from HKD 670 to HKD 660. Despite capital expenditures exceeding expectations resulting in negative free cash flow, the firm reaffirmed its "Buy" rating, believing that although AI investments are front-loaded and large in scale, they are expected to bring long-term value, with benefits from WorkBuddy and others gradually becoming apparent
According to the Zhitong Finance APP, Daiwa released a research report stating that due to the expansion of AI investments affecting profitability, it has lowered the earnings per share forecast for Tencent Holdings (00700) for 2026 to 2028 by 1% to 2%. The "Buy" rating is reiterated, with the target price slightly adjusted from HKD 670 to HKD 660.
The report indicates that Tencent's performance in the second quarter of 2026 roughly met expectations, with the advertising business being the main surprise. The total revenue from games in the second quarter roughly met expectations, benefiting from strong domestic game growth, which increased by 17% year-on-year, while international games performed weakly, declining by 0.8% year-on-year. Market focus is on AI investments and progress, with capital expenditures reaching RMB 51.8 billion, far exceeding the market expectation of RMB 40 billion to 45 billion, while the prepayment for computing power turned the report's free cash flow negative at RMB 13.8 billion.
The report states that Tencent's AI investment cycle is larger than expected, thus raising the capital expenditure forecast for 2026 to approximately RMB 220 billion, up from the original forecast of RMB 178 billion, which corresponds to an estimated revenue of about 27%. In addition to the RMB 51.8 billion in operating capital expenditures, the prepayment for computing power also puts pressure on cash flow, but both support multi-year utilization rates. Most investments, especially training-related expenses, seem to be concentrated in the upfront investments for 2026 to 2027, rather than representing a sustained operational level. Although short-term expenditures may remain high, Tencent believes that current AI spending can be justified by attractive long-term returns. Management pointed out that computing power can now be monetized through resale, but the company still prioritizes advancing AI plans, as it believes they can create greater long-term value. The firm expects the substantial benefits of WorkBuddy and small and micro enterprises to gradually emerge, requiring investors to be patient