Haitong International has released a research report indicating it has revised its earnings per share forecasts for TENCENT (00700) for 2026 and 2027 downward by 3% and 10%, respectively, to account for the current burden of forward-looking AI investments. Consequently, the price target has been reduced by 9%, from HK$525 to HK$480.

The firm maintains a positive long-term outlook on TENCENT, reiterating an "Outperform" rating. The company's second-quarter 2026 revenue came in at RMB 204.8 billion, an 11% year-on-year increase, which broadly met market expectations. Gross profit was RMB 118.4 billion, with a gross margin of 57.8%, outperforming estimates by 2%. Adjusted operating profit reached RMB 75.6 billion, with an operating margin of 36.9%, and adjusted net profit was RMB 68.4 billion, with a net margin of 33.4%, both of which were largely in line with forecasts.

The report points out that TENCENT's free cash flow turned negative in the second quarter due to an accelerated pace of AI investment. While increased AI spending was anticipated, the annualized capital expenditure run rate (approximately RMB 220 billion) still surprised the firm. Though quantifying the exact impact of higher capital expenditure is challenging, the firm gained insights by examining the profit differential before and after accounting for AI investment. It estimates that AI investment in 2026 will have an impact of nearly RMB 50 billion through cost of sales and operating expenses. Due to the distinct characteristics of the core business compared to the AI business, the firm has shifted from a price-to-earnings (P/E) methodology to a sum-of-the-parts (SOTP) valuation to better reflect the value of the core business and the potential value of AI.