We model 13% YoY inline topline in 4Q25 mainly driven by solid 18% YoY online game and resilient 17% YoY online ad. RMB60.4bn forecasted operating profit was slightly below consensus by 1% despite GP being inline due to increased AI-related Opex. We believe the Co. is dedicated to executing consistent AI strategies to generate high quality growth engines on its vibrant users, communities, content, infrastructures and monetisation ecosystems. Maintain BUY and slightly raise our SOTP TP to HK$742.0.
Key Factors for Rating
Enhanced growth engines on consistent AI strategies. We expect high quality growth engines will sustain on healthy user, community, content and monetisation ecosystems empowered by its committed and consistent AI investments and strategies. Specifically for AI strategies, Co. will continue to i) upgrade and reiterate foundation LLM; ii) integrate with more in-house functionalities and infrastructures especially Weixin; iii) develop, launch and promote diverse AI products; and iv) prioritise developing own capabilities over external monetisations. We see game and online ad are bearing fruits with AI empowerments and expect sustainable growth momentum to continue in coming years contributed by consistent driving forces. Thus, we raise our FY2026-27E topline forecasts by 1%, mainly driven by 2-3% increase of game estimates. We nudge down our FY2025-27E bottom line estimates to factor in more AI-related opex assumptions.
4Q25 preview: Inline topline; Increasing AI-related opex. We model total revenue will grow at 13% YoY to RMB194.8bn, in line with consensus. We estimate 14% YoY VAS revenue driven by 7% YoY social network and 18% YoY online game. Within online game, we forecast solid 15% YoY domestic games contributed by several top evergreen franchises across terminals and newly launched Valorant Mobile. Online ad revenue continues to be resilient at +17% YoY mainly driven by video account, Weixin search and Moments on accelerated AI empowerments and progressive monetisation executions. We expect FBS to deliver 10% YoY driven by stable offline activities and strong BS momentums. 56.0% forcasted GPM meet consensus. We model adj. operating profit to grow 15% YoY to RMB68.4bn mainly factoring in AI-related operating expenses. Capex is projected to be around RMB23bn, accounting for 12% of total revenue.
Key Risks for Rating
Downside risks: 1) regulations on games, fintech, online ad, streaming, personal data, taxation, etc.; 2) intensified competition for key segments; 3) weakerthan- expected macro; 4) destructive investments; 5) accelerated share divestment from main shareholder.
Valuation
Reiterate BUY and slightly lift our SOTP TP to HK$742.0 on our updated estimates with corresponding 2026E multiples assigned to each segment derived from corresponding market position and 2026E gross profit growth (18.0x PER for online game, 20.0x PER for online ad, 13.0x PER for fintech & BS, 3x PSR for cloud) and latest subsidiaries and investments’ valuation.