TENCENT (00700) is scheduled to release its first-quarter results for the period ending March 31, 2026, this Wednesday (May 13). Benefiting from incremental ad loads on Video Channels, efficiency gains from ongoing AI optimization, and growth in cloud services, these positive factors largely offset the impact of a lack of major new game releases during the quarter, certain AI-related investments, and a deceleration in gaming revenue growth from a high base. Market consensus forecasts indicate Q1 revenue is expected to be approximately RMB 199.53 billion, a year-on-year increase of 10.8%. Adjusted net profit is projected to be around RMB 67.66 billion, up 10.3% year-on-year. Overall, TENCENT's Q1 2026 report is likely to be characterized by "steady growth coupled with AI acceleration." While maintaining competitiveness in core businesses like gaming and advertising, its AI strategy is gradually transitioning from the investment phase into a phase of commercial monetization. However, the market currently harbors concerns regarding three key issues: the magnitude of capital expenditure; whether such substantial investment can yield a top-tier model; and the extent to which subsequent capital expenditures will translate into actual profits. These are the focal points for the capital markets and key areas for investor monitoring.

AI Strategy: Open-Sourcing of Hunyuan HY3 Preview, Agent Capabilities as Key Valuation Drivers On April 23, TENCENT released and open-sourced the Hunyuan HY3 Preview model. Led by Yao Shunyu, this model is the first version following the restructuring of the Hunyuan team. It employs a Mixture-of-Experts (MoE) architecture with fast and slow components, featuring 295B total parameters, 21B activated parameters, and a 256K context length. This initial release is relatively compact in size, emphasizing practicality and cost-effectiveness while significantly enhancing Agent capabilities. The new-generation model shows improved performance in chat, coding, intelligent agents, mathematical reasoning, instruction following, and contextual understanding. Looking ahead, it is anticipated that the official large-parameter version of HY3 will be released subsequently, and collaborations within WeChat centered on Agent functionalities are expected to deepen further. Considering TENCENT's formidable advantages in user access points, application scenarios, social relationship chains, information/content ecosystems, and Mini Program infrastructure, from a current market valuation perspective, whether TENCENT can demonstrate potential in the Agent domain and develop an outstanding large language model will be decisive factors for its future valuation level. It is believed that TENCENT, leveraging its vast WeChat ecosystem, is well-positioned for AI application monetization, with earnings expected to demonstrate greater resilience compared to peers. The open-sourced Hunyuan 3.0 preview version in April shows a 40% improvement in inference efficiency over Hunyuan 2.0, with input and output costs reduced by over 50%. The new model and agent-based applications are expected to contribute to a re-rating of TENCENT's stock. A "High Conviction Outperform" rating is maintained with a target price of HKD 740. Conversely, it is noted that TENCENT's in-house model "Hunyuan (HYV)" currently lags behind ByteDance's "Doubao" and Alibaba's "Tongyi Qianwen," primarily due to relatively insufficient investment prior to 2025. In the second half of 2025, TENCENT adjusted its AI strategy, forming a new team led by newly recruited former core members from OpenAI, and released Hunyuan 3.0 in April 2026. Due to the significant strategic increase in AI talent and infrastructure investment starting from 2026, TENCENT's Q1 operating profit margin (OPM) is forecast to decline slightly by 0.5 percentage points year-on-year to 38%.

Value-Added Services: Steady Growth in Gaming, Evergreen and New Titles Maintain Strong Performance Based on consensus forecasts from multiple brokerages, TENCENT's gaming business is expected to achieve steady growth in Q1 2026. The market generally anticipates overall online game revenue growth between 10% and 14% year-on-year, benefiting from the robust performance of evergreen titles like "Honor of Kings" and "Peacekeeper Elite," as well as newer games such as "Delta Force." A research report expects TENCENT's online game revenue for the period to grow 12.9% year-on-year, primarily driven by strong performance from "Honor of Kings," "Peacekeeper Elite," and "Delta Force." It is projected that TENCENT's Value-Added Services (VAS) revenue will increase 6.9% year-on-year in Q1 2026, with online games growing 10%. Domestic and international market games are expected to grow 8% and 15%, respectively. The growth deceleration is attributed to a high base, a later Lunar New Year holiday, and the diminishing effects of overseas studio acquisitions and the Supercell deferred revenue cycle. A research note points out that TENCENT will release its Q1 FY2026 results on May 13. The firm expects TENCENT's gaming and advertising businesses to be stable in Q1, forecasting total revenue growth of 9.9% year-on-year to RMB 197.9 billion; non-GAAP net profit is estimated to grow 9.7% year-on-year to RMB 67.2 billion, largely in line with market expectations. Driven by seasonal Lunar New Year factors and stable performance of evergreen games, overall online game revenue is expected to grow 11.7% year-on-year to RMB 66.4 billion. Within this, domestic and international game revenues are projected to grow 10% and 16% year-on-year, respectively. A research report provides a breakdown, estimating online game business revenue at RMB 67.9 billion, up 14% year-on-year. Domestic game revenue is expected to grow 13%, with "Delta Force" and the newly launched "Rock Kingdom" performing well; overseas game revenue is forecast to grow 16%.

Online Advertising: Video Channels and AI Empowerment Drive Accelerated Advertising Revenue Growth Synthesizing views from multiple brokerages, TENCENT's online advertising business is expected to achieve relatively fast growth in Q1 2026. The market generally anticipates advertising revenue growth between 18% and 20% year-on-year, with a sequential acceleration in growth rate. This is attributed to benefits from Video Channels incentive ads, advancements in platform e-commerce collaborations, and the increasing penetration of AI-powered smart delivery products (such as automated targeting configuration, automated bidding, and automated delivery). Furthermore, the launch of TENCENT Ads' official knowledge Skill and AIM+ products is expected to further drive advertising business growth. It is believed that the penetration rate of the company's smart delivery products remains relatively low. In the future, automated targeting configuration, bidding, and delivery are expected to help advertisers optimize creative generation and improve marketing ROI. AI empowerment is projected to significantly extend the growth cycle of the advertising business, potentially raising its long-term growth trajectory. From a technical perspective, it is noted that TENCENT Ads has launched the official knowledge Skill "tencent-ads-assistant," officially listed on ClawHub. This Skill is backed by TENCENT Ads' dynamically updated official AI knowledge base. With the launch of the AIM+ product, its penetration rate is expected to continue increasing, thereby driving advertising business growth. A research report states that Q1 marketing services (online advertising) revenue is estimated at RMB 37.6 billion, an 18% year-on-year increase, accelerating sequentially. This is mainly due to Video Channels incentive ads and platform e-commerce collaborations. FinTech and Business Services revenue is projected at RMB 60.4 billion, up 10% year-on-year, with payment services correlating to macro consumption. Simultaneously, the company's product portfolio and ecosystem integration in the OpenClaw domain maintain a leading domestic position. It is expected that TENCENT's advertising revenue for the period will rebound to approximately 20% year-on-year growth, with FinTech and Business Services growth also accelerating.