On August 20, Bank of America published a report titled "Tencent Holdings: Key Takeaways from Investor Meeting," maintaining a "Buy" rating for Tencent with a target price of HKD 690. With Tencent's current stock price at HKD 593, there is promising upside potential. In the report, Bank of America maintains an optimistic outlook on Tencent's AI potential, sustainable growth of core businesses, and profit margin performance, believing that upgrades to the Hunyuan large model and accelerated Yuanbao promotion will serve as important catalysts.

**AI: Building Ecosystem Closed Loop with Multi-dimensional Breakthroughs**

In the AI sector, Tencent is investing full resources to upgrade and optimize the Hunyuan foundation model. To build a comprehensive integrated closed-loop AI ecosystem, a robust foundation model is crucial. Regarding Yuanbao, Tencent has recently promoted traffic diversion from other applications to Yuanbao, successfully driving a rebound in Yuanbao user numbers. With Hunyuan model upgrades, Yuanbao's functionality will see significant enhancement. Bank of America expects more cross-promotional activities to further accelerate Yuanbao user growth in the future.

Agentic AI within WeChat represents a unique advantage for Tencent. Its mini-program ecosystem allows service providers and enterprises to deploy code, closely integrated with social, payment, and login systems. Notably, Kakao will launch AI services next month, expected to demonstrate the powerful capabilities of super agents, providing reference for Tencent's related businesses.

On the commercialization front, AI-driven revenue opportunities have already emerged in advertising, gaming, and cloud businesses. Looking ahead, advertising revenue from native AI applications and commission/transaction revenue from Agentic AI hold enormous potential. Tencent's capital expenditure is dynamic, primarily depending on chip supply conditions. Q4 2024 is in a phase of compensating for previous insufficient spending, Q1 2025 returns to normal levels, while Q2 2025 declined due to supply issues.

**Financial Technology and Enterprise Services: Emerging from Difficulties, Steady Recovery**

Payment business is experiencing a turnaround, with commercial payments turning positive year-over-year in Q2 2024, benefiting from stable price levels. Bank of America expects payment business to continue recovering, with accelerated growth in the second half helping offset the slowdown in gaming business growth.

Regarding credit business, the current environment is increasingly favorable. Low interest rates, high household savings, macroeconomic stability, and improved non-performing loan indicators all create favorable conditions for credit business development. Tencent is gradually deploying AI to assist credit scoring, and its growing e-commerce business provides natural application scenarios for consumer loans.

Cloud business maintains double-digit year-over-year growth. Tencent holds competitive advantages in real-time communication solutions, continuously capturing enterprises' growing demands.

**Advertising Business: AI as Core Driver**

AI's driving effect on advertising business has been validated through Meta. Bank of America believes that with more data and rich user interaction services including payments, content, mini-programs, and mini-stores, Tencent's performance in this area will not fall short of Meta's.

In Q2 2025, over half of advertising growth came from improved cost per mille (CPM), benefiting from enhanced click-through rates (CTR), with the remainder from increased impressions. CTR improvement mainly benefits from two aspects: first, expanded data dimensions covering longer time ranges and cross-referencing user content interactions; second, algorithmic upgrades of foundation models.

Going forward, advertising business growth will continue benefiting from AI dividends, rising CTR, WeChat Channels traffic (potentially higher ad load rates), deepened closed-loop transactions, and advancement of search commercialization.

**Gaming Business: Dual Support from AI and Engine Upgrades**

AI brings efficiency improvements to gaming content production, while superior gaming engines (such as Unreal Engine 5) help gradually upgrade game graphics. High-quality, high-frequency game content updates can enhance game performance and extend game lifecycles.

Tencent maintains optimism about international gaming market opportunities, with its expertise in technology, productivity, and Games-as-a-Service (GaaS) constituting significant advantages.

**Profit Margins: Continuous Expansion with Broad Potential**

Tencent's gross margins are expected to continue expanding with substantial potential, with main drivers including:

Gaming business: More favorable app store revenue sharing, business mix tilting toward high-margin self-developed and cross-platform games. In overseas markets, progress is gradually being made in various countries allowing payments outside app stores.

Financial Technology and Enterprise Services: Increased proportion of high-margin financial products.

Advertising business: Higher proportion and faster growth of WeChat Channels ads and mini-program ads.

**Mini-Program Store: Focus on Service Capability Enhancement**

WeChat mini-program store's Gross Merchandise Value (GMV) is growing rapidly, with minimal impact from external factors. The conversion from mini-program GMV to mini-program store brings higher comprehensive commission rates and more transaction data, which also greatly benefits the advertising business.

Tencent management stated they do not plan to participate in food delivery competition, instead focusing on enhancing ecosystem service capabilities such as delivery, returns, and product variety for the mini-program store.

**Target Price Rationale and Risk Warnings**

Bank of America sets Tencent's target price at HKD 690 based on two main factors: first, discounted cash flow (DCF) calculation based on Tencent's comprehensive business, with weighted average cost of capital (WACC) at 8.6%, expected compound annual growth rate (CAGR) of 9% for 2021-2028, terminal growth rate of 4%, corresponding to HKD 616 value; second, HKD 74 from investment equity, including HKD 64 from listed portfolio companies and HKD 10 from unlisted portfolio companies after discount.

However, investing in Tencent requires attention to potential risks, including competition from new traffic platforms and media formats, regulatory risks in multiple areas such as fintech, weakening momentum of new games, cost pressures from new game promotion and AI investment, macroeconomic weakness affecting advertising and fintech businesses, geopolitical risks, and AI investment impact on profits.

Meanwhile, numerous upside risks exist, such as macroeconomic recovery exceeding expectations, excellent performance of new games, synergistic effects from ecosystem openness with other internet platforms, accelerated e-commerce business development, potential confidence boost from removal from the 1260H list, and breakthrough progress in AI applications.

Overall, Bank of America believes that with AI's strong driving force, Tencent's core business lines are working synergistically, offering considerable future growth potential worthy of investors' key attention.