Morgan Stanley: TENCENT (00700) increases AI investment affecting short-term profits, lowers target price to HKD 550.

Morgan Stanley's research report states that TENCENT (00700) has a robust core business foundation. However, due to increased investment in artificial intelligence, it is expected that profits will remain roughly flat from the second half of 2026 to 2027. As a result, they have decided to lower the target price from HKD 650 to HKD 550 while maintaining an "Overweight" rating. The bank expects Tencent's AI investments to accelerate in the second half of the year, mainly focusing on the rapid development of the Hy () model (Hy4 is set to launch later this year) and expanding the productivity AI domain through WorkBuddy and CodeBuddy. Morgan Stanley has raised its forecast for Tencent's capital expenditures for 2026 and 2027 to RMB 200 billion each, and has correspondingly lowered the non-International Financial Reporting Standards operating profit forecast for 2026 by 1.8% and by 12.3% for 2027. The bank anticipates that the non-International Financial Reporting Standards operating profit margin will narrow from 37.3% in 2025 to 35.5% in 2026 and 32.4% in 2027. The report notes that Tencent's performance in the second quarter of this year was largely in line with expectations, with a year-on-year revenue growth of 11%, surpassing expectations, mainly driven by advertising business; non-International Financial Reporting Standards operating profit rose by 9.2% year-on-year. It is expected that the revenue growth momentum will continue into the third quarter, with a year-on-year increase of 10.6%, but impacted by AI investment, the growth of non-International Financial Reporting Standards operating profit will slow to 2.7%. Morgan Stanley believes that Tencent's core business is among the strongest in the Chinese internet industry, possessing lasting competitive advantages, and that the AI empowerment of WeChat, gaming, and advertising businesses continues to strengthen. Although increased AI investments may affect short-term profits, they are expected to create substantial value in the long run. Tencent's current price corresponds to a projected price-to-earnings ratio of about 13.1 times for 2026, which is at a historical low, while the bank's target price corresponds to a projected price-to-earnings ratio of 15.6 times for this year.