Tencent Holdings (00700) reported a first-quarter Non-IFRS net profit increase of 11% year-on-year, aligning with market expectations. Revenue for the quarter rose 9% year-on-year, falling short of market forecasts, attributed to deferred revenue recognition from gaming flows. CICC has maintained its revenue and Non-IFRS net profit projections for Tencent for the current and following years. The firm reaffirms an "Outperform" rating and a target price of HKD 666, corresponding to a projected Non-IFRS price-to-earnings ratio of 20 times for this year.

The report highlighted that Tencent's gaming segment achieved robust growth in first-quarter flows, with its evergreen titles reaching new highs. A later Chinese New Year this year resulted in the deferral of some gaming revenue and associated payouts to subsequent quarters, impacting the first-quarter figures. CICC anticipates domestic gaming revenue to increase by 12% year-on-year in the second quarter, with overseas gaming revenue growing by 10%.

First-quarter advertising revenue accelerated, rising 20% year-on-year, and is projected to increase by 17% year-on-year in the second quarter. The financial services business grew 7% year-on-year, exceeding prior expectations, driven by improvements in commercial payment volume and pricing, alongside steady wealth management growth. The enterprise services segment saw a 20% year-on-year revenue increase, benefiting from both volume and price growth in cloud services. CICC forecasts a 25% year-on-year rise in second-quarter enterprise services revenue and a 10% increase in combined financial and enterprise services revenue.

The report views Tencent's AI investments as proactive and manageable. The company open-sourced its Hunyuan 3.0 preview large language model in late April, balancing practicality and cost-effectiveness. It has been deployed across 131 internal products for collaborative iteration, with plans to advance towards larger parameter models. Management considers platforms like WeChat, QQ, and WeCom as natural control interfaces for agentic AI. Future initiatives to convert mini-program code into AI skills could establish a differentiated ecosystem barrier.

Excluding the impact of new AI products, first-quarter Non-IFRS operating profit grew 17% year-on-year, indicating robust profitability in core businesses. This is expected to provide sufficient cash flow to support AI investments. CICC projects that Tencent's adjusted operating profit and adjusted net profit for the second quarter will increase by 7% and 9% year-on-year, respectively.