According to a research report from Goldman Sachs, China's gaming and entertainment sector experienced broad-based stock price gains in 2025, with large and mid-cap stocks rising 50% to 80% (compared to the Hang Seng China Enterprises Index's 26% gain), and this strong performance continued into early 2026, with some stocks surging up to 30% (versus a 3-5% rise for the relevant indices). The bank attributes this rally as being half driven by valuation expansion and half by earnings per share growth. Looking ahead to 2026, the bank has framed the key themes and debates for the sector, believing that the risk-reward profile remains attractive but is now more skewed towards "alpha"-driven opportunities. The bank expresses a preference for companies with new growth potential (such as the penetration of AI applications and accelerated overseas expansion) and those with room for compound growth/profit expansion amid intensifying competition, particularly given concerns surrounding competition from ByteDance.

The report highlights that (1) ByteDance competition has become a core investor concern in some growth segments, but it emphasizes significant differences across segments: short drama/mini-game platforms are rapidly emerging, while music streaming is a key debate area. The bank believes Tencent Music (TME.US) has a differentiated position in terms of ARPU and non-subscription revenue growth. (2) Accelerated overseas market expansion: Chinese game publishers and content platforms (represented by Tencent Holdings (00700) and NetEase-S (09999)) are accelerating their overseas expansion. The advantages of Chinese game developers lie in their capital and talent intensity, strong technical capabilities, and efficient continuous content upgrades, which are driving a further increase in their global market share from the current level of approximately 15%. (3) Regarding the empowerment and disruption from AI applications, Goldman Sachs states that AI is not only beginning to reduce production and labor costs but also offers increasing potential for efficiency gains and revenue enhancement. Particularly in the gaming and advertising sectors, AI is driving revenue growth and efficiency improvements. With the ongoing upgrades to multimodal large models, more application scenarios and enterprise adoption opportunities are expected to emerge; the bank forecasts that the total addressable market (TAM) for AI video generation tools could expand tenfold by 2028.

Goldman Sachs' selected core buy-rated stocks include Tencent, NetEase, Kuaishou-W (01024), Bilibili (BILI.US), and Tencent Music. The bank believes Tencent's core businesses (gaming + advertising) will continue to deliver low to mid-teens annual growth, primarily benefiting from the staying power of evergreen games, a key product pipeline, and enhancements to its advertising ecosystem from monetization and AI. The bank continues to view Tencent as a key proxy for AI application adoption and a core holding for investors. The bank maintains its "Buy" rating on Tencent but has lowered its target price from HK$770 to HK$752.