Tencent announced in-line 4Q25 results: total revenue increased by 13% YoY to RMB194.4bn, and non-IFRS operating income was up by 17% YoY to RMB69.5bn, both in line with Bloomberg consensus estimates. FY25 total revenue/non-IFRS operating income grew by 14%/18% YoY. FY26 will be a key investment year for Tencent AI, and management expected to more than double the investment in new AI products in FY26 (>RMB36bn). Though the AI investment may drag short-term earnings growth, we expect this to strengthen Tencent’s core businesses, capture new opportunities like agentic AI, and ease investors’ concern that Tencent may lag in the AI competition due to underinvestment. Given the step-up in investment, we lower our FY26-27E earnings forecast by 2-3%, and fine-tune our SOTP-derived target price to HK$750.0 (previous: HK$760.0). That said, we remain upbeat on the resilience of Tencent’s core businesses and emerging AI opportunities. Maintain BUY.
Core existing businesses maintained solid performance. By segment, in 4Q25: 1) Games revenue grew by 21% YoY to RMB59.3bn (31% of total revenue), driven by solid growth of both domestic games/international games revenue (+15%/+32% YoY). Looking ahead, highly-anticipated titles Roco Kingdom: World and HoK: World are lined for launch in 1H26, which shall support the solid games revenue growth in FY26E, in our view. 2) Marketing services revenue grew by 17% YoY to RMB41.1bn (21% of total revenue), mainly attributable to the AI-enhanced ad performance and pricing. Ad impressions grew slightly due to higher user engagement and ad load rate. 3) Fintech and Business Services (FBS) revenue increased by 8% YoY to RMB60.8bn (31% of total revenue). Business services revenue growth accelerated to +22% YoY in 4Q25 (vs. teens% growth in 9M25), thanks to the strong demand for AI-related services and higher e-commerce tech service fees. Tencent Cloud achieved positive adjusted operating profit of RMB5bn in FY25, due to increased AI demand and higher revenue contribution from high-margin SaaS & PaaS products.
Capture emerging AI opportunities. We expect several catalysts on the AI front in FY26: 1) foundation models: HY 3.0, the first flagship foundation model after the restructuring of Tencent AI team, is now under internal testing and will be available externally starting from April; 2) Weixin AI: Tencent is building the next-gen agentic services in Weixin, which will boost ecosystem activities and may generate revenue itself; 3) productivity AI: the company is introducing a range of autonomous AI agents like WorkBuddy and Qclaw to its social platforms, creating new monetization opportunities.
Double investment in new AI products in FY26E. Total costs and expenses for the new AI products were RMB18bn in FY25, and Tencent expects to more than double this investment in FY26E (>RMB36bn, c.4% of FY26E total revenue). That said, management expected increased profits from existing businesses to more than offset the incremental investments. We expect non-IFRS OPM to decline by 1ppt YoY to 36% in FY26E, due to AI investment. We forecast sustainable total revenue growth of 10%/7%/5% over FY26-28E; and expect non-IFRS OP growth to decelerate to +6% YoY in FY26E, but then reaccelerate to 10%/8% in FY27/28E.