CICC: Maintaining Tencent Holdings' (00700) “Outperform the Industry” Rating Target Price of HK$600

The Zhitong Finance App learned that CICC released a research report saying that based on the rapid growth in advertising and game revenue of Tencent Holdings (00700), the bank raised 2025/2026 revenue by 2%/4% to 7,308/784.2 billion yuan, respectively, and basically kept the 2025/2026 non-IFRS net profit forecast unchanged. Maintaining the “outperforming industry” rating, keeping the target price of HK$600 unchanged, corresponding to 19.9x/17.5x 2025e/2026e non-IFRS P/E, with 15% upside. The current share price is trading at 17.3x/15.2x 2025e/2026e Non-IFRS P/E.

CICC's main views are as follows:

Revenue and non-IFRS net profit for the first quarter of 2025 were better than the forecast

Tencent's 1Q25 revenue also increased 13% to 180 billion yuan, 2.4% higher than the bank's forecast and 2.5% higher than market expectations, mainly due to gaming and advertising revenue exceeding expectations; non-IFRS net profit also increased 22% to 61.3 billion yuan, higher than the bank's forecast of 1% and 3% higher than market expectations. The good profit side performance was mainly due to gross margins exceeding expectations in many businesses.

The growth rate of game revenue has greatly exceeded market expectations

The company's 1Q25 game revenue also increased by 24% to 59.5 billion yuan, exceeding the forecast by 7%. Among them, overseas game revenue also increased 23%. Games such as “Wild Brawl”, “Clash Royale” and “PUBG M” performed strongly; domestic game revenue also increased by 24%, thanks to games such as “Wang Zhe Rongyao,” “Peace Elite,” “DNF M,” and “Operation Delta.” The company's basic Evergreen game platform is still stable, and has benefited from the rapid increase in the size of the domestic market in the FPA (first person action) category in recent years. The bank expects 2Q25 game revenue to increase 17%, and game revenue for the whole year is also expected to increase 16%.

The ad slightly exceeded expectations, and the long-term growth trend is clear

The company's 1Q25 advertising business revenue also increased 20% to 31.9 billion yuan, higher than the forecast of 4%. Video accounts, applets, and WeChat search ads performed well. Among them, video ad revenue increased by more than 60% year on year. The company also stated that by improving generative AI capabilities, it has upgraded advertising technology platforms, such as empowering the production of advertising materials, live streaming of digital people, and improving recommendation effectiveness. The bank expects a 17% increase in advertising revenue in 2Q25. In addition, 1Q25 financial and corporate service revenue also increased by 5%. Among them, the bank estimates that fintech revenue also increased 3% (mainly dependent on loans and financial management), and commercial payment revenue still declined slightly year-on-year; the bank estimates that 1Q25 enterprise service revenue also increased 13%, with cloud computing and video e-commerce technology service fees contributing.

The gross margin of many businesses increased significantly year-on-year

1q25's gross margin increased by 3.2ppt year-on-year, mainly due to VAS (high-margin domestic game revenue growing rapidly) and FBS business gross profit margin (improving gross profit while corporate services and payment businesses simultaneously), which increased 2.3 ppt and 4.7 ppt, respectively. In terms of expense ratio, the 1Q25 sales expense ratio was 4.4%, down 0.4ppt year on year; the management expense ratio was 18.7%, up 3.1 ppt year on year. This quarter was affected by one-time share compensation expenses of 4 billion yuan due to the restructuring of overseas subsidiaries; due to the good overall performance of gross margin, 1Q25 non-IFRS operating profit also increased 18%, and non-IFRS net profit also increased 22%. In terms of CAPEX, the company invested 27.5 billion yuan in capital expenditure in 1Q25, an increase of 91% over the previous year. The company said that the current operating leverage brought about by high-quality revenue can effectively absorb AI investment costs; however, there is a time lag between AI investment and specific commercialization (GPU depreciation expenses will advance before AI commercialization progress), so the gap between subsequent revenue and the year-on-year growth rate of operating profit will narrow. In terms of shareholder returns, the company repurchased a total of HK$17.1 billion of shares in 1Q25 (21% of the annual repurchase plan has been completed in 1Q25).

Risk warning: Regulatory risk; new game launches fall short of expectations; higher cost or fee rates than expected.