Morgan Stanley: Downgrades Tencent's target price by over 15%, expecting increased AI investment to drag down short-term profits.

Morgan Stanley stated that Tencent's solid core fundamentals are offset by the front-loaded investments in artificial intelligence, predicting that the company's profits will remain flat from the second half of this year through 2027. They lowered the target price for the company by over 15% to HKD 550 while maintaining an overweight rating. Analysts including Gary Yu pointed out in their report that the capital expenditure forecast for Tencent for 2026-2027 was raised to RMB 200 billion, while the operating profit under non-International Financial Reporting Standards for this year and next was adjusted down by 1.8% and 12.3%, respectively. Although increased AI investment may put pressure on short-term profits, Tencent has a solid foundation to create long-term value. If necessary, excess AI infrastructure capacity can be monetized through Tencent Cloud, providing additional downside protection. Tencent's core business is one of the strongest in the Chinese internet industry, benefiting from a lasting competitive moat, as well as the ever-increasing support of artificial intelligence in the areas of WeChat, gaming, and advertising.