We expect a solid 1Q26E for Tencent: we forecast total revenue to grow by 10% YoY to RMB198.4bn, and non-IFRS net income to increase by 9% YoY to RMB66.8bn in 1Q26E, primarily driven by the strong core gaming and marketing businesses, but partially offset by the increased AI investment. Tencent’s core businesses continue to benefit from AI and maintain solid growth momentum. Though AI investment impacts short-term margin, it also creates short-term catalysts (e.g. launch of HY 3.0 model and Weixin AI agents) and empowers core businesses over the long term, in our view. After 4Q25 results, we believe the market overreacted to the potential AI threat and near-term margin pressure from AI investments, leaving Tencent trading at an attractive valuation of 14x FY26E non-IFRS PE. We maintain our earnings forecast, and keep our SOTPderived target price unchanged at HK$750.0. Maintain BUY.
Solid revenue growth across core businesses. Looking into 1Q26E, we expect: 1) games revenue to grow 12% YoY to RMB66.4bn (vs. Bloomberg consensus +13% YoY), driven by solid growth of both domestic/overseas games revenue growth (+10%/+16% YoY). Evergreen games maintained healthy billings performance during the Spring Festival holidays, but we also noticed that the late start of Spring Festival this year led to fewer days for revenue recognition of the peak season in 1Q26; 2) marketing revenue to increase by 18% YoY to RMB37.5bn (vs. consensus +18% YoY), fuelled by the AI empowerment and increase in ad inventory of Video Account; 3) Fintech and Business Services (FBS) revenue to grow by 8% YoY to RMB59.4bn (vs. consensus +9% YoY), mainly driven by the accelerating cloud revenue growth.
Resilient earnings growth despite AI investment. On the margin front, we expect the solid performance of core businesses will help Tencent maintain resilient non-IFRS earnings growth in 1Q26E/FY26E (+9%/6% YoY), though stepped-up AI investment will gradually create margin pressure. We forecast overall GPM to improve by 0.5ppt YoY to 56.3% in 1Q26E, driven by strong growth of higher-margin games and marketing businesses. We expect non-IFRS net margin to decline by 0.4ppt YoY to 33.7% in 1Q26E, mainly due to the AI investment related to user acquisition, staff costs, depreciation and leasing.
Key catalysts to support business growth and valuation. Looking ahead, we expect several catalysts to support Tencent’s fundamental and valuation recovery: 1) launch of HY 3.0 model in Apr 2026, which is Tencent’s first flagship foundation model after the restructuring of Tencent AI team; 2) upgrade of agentic applications like WorkBuddy, which enables Tencent to leverage Weixin+AI to tap into the enormous AI agent market; 3) incremental revenue contribution from major new games like Honor of Kings: World and Roco Kingdom: World; 4) faster-than-sector marketing revenue growth supported by AI empowerment and improved monetization efficiency.
Our SOTP-derived target price of HK$750.0 comprises, per share:
1) HK$350.5 for the games business, based on a 24x 2026E PE, which is at a premium to the average PE for its global gaming peers (18x), mainly due to Tencent’s strong leadership in China’s games industry and diversified games portfolio.
2) HK$31.3 for the SNS business, including the market cap of Tencent’s stake in its subsidiaries, the valuation of Tencent Video (based on a 3.5x 2026E PS, at a premium to the 1.5x average PS of its peers given its content and user traffic leadership), and the valuation of other membership services (based on a 3.5x 2026E PS).
3) HK$148.3 for the marketing services business, based on a 22x 2026E PE, which is at a premium to the industry average (20x). This reflects Tencent’s more resilient ad revenue growth outlook, supported by the solid performance of Weixin Video Account and Mini Program.
4) HK$105.6 for the fintech business, based on a 4.5x 2026E PS, at a premium to the peer average (1.3x). This mainly reflects Tencent’s strong leadership in China’s digital payment market and its potential to capture other fintech business opportunities.
5) HK$33.4 for the cloud business, based on a 4.5x 2026E PS, at a discount to the industry average (5.2x) as Tencent’s current offerings mainly involve the lower-margin IaaS business.
6) HK$72.7 for strategic investments, based on the current market value of Tencent’s listed investments and the book value of its unlisted investments. We apply a 30% holding company discount to the fair value of Tencent’s equity investments.
7) HK$8.6 for net cash.