---
endpoint: analytics
pattern: Internet
status: done
latency_ms: 292953
conversation_id: 5f4880e3-c533-493b-ab92-af2248c4adc9
citations: 21
created: 2026-05-31 19:24:23Z
---

# Provide a one‑year narrative of Tencent, outlining how business performance, market conditions, and company actions shaped investor sentiment and valuation.

# Tencent Holdings (700 HK) — One-Year Narrative (May 2025 → May 2026)

The past twelve months have been a study in narrative whiplash: a company posting some of its strongest fundamental quarters in years, yet ending the period with its share price *lower* than where it began. The story is one of operational over-delivery (games, ads, FinTech, margins) that was first rewarded with a 2025 re-rating, then progressively de-rated through early 2026 as the market questioned whether Tencent's relatively measured AI capex stance was an asset or a strategic vulnerability.

---

## I. May 2025 — Setting the Stage at the High-Water Mark

Tencent entered the period coming off a 1Q25 print that beat across virtually every line. CLSA framed it as "accelerated game and ad growth," with total revenue / adj. EBIT growing **12.9% / 18.3% YoY to Rmb180bn / Rmb69.3bn**, both ~3% above estimates [1]. The composition of the beat mattered as much as the magnitude:

- **Online games revenue accelerated to +23.7% YoY** — evergreen titles (Honour of Kings, Peacekeeper Elite, VALORANT) plus new hits (DnF Mobile, Delta Force) [1].
- **Ad revenue accelerated to +20% YoY**, boosted by the adtech foundation-model upgrade and Video Accounts inventory [1].
- **Gross margin expanded ~3.2ppts YoY to 55.8%**, with VAS, ads and FBS all improving simultaneously — a rare three-segment alignment [4].

Sentiment heading into 2H25 was constructive. The stock was sitting around **HK$520** with a 24% implied upside to CLSA's **HK$645 target price**, on a 14.8x 26CL adj. PE for the core (Social/Games/Ad) plus separate marks for Fintech (3x P/S), Cloud (5x P/S), Net Cash and a 15% holding-co discount on strategic investments [2][3]. CLSA's pitch — Weixin's AI integration (Yuanbao as a contact, HunYuan Turbo, DeepSeek R1 in Weixin Search) as a free option on agentic monetization — was the consensus bull frame [5].

Capital return was a key support: Tencent had repurchased ~43m shares for HK$17.1bn in 1Q25 alone and reiterated the **HK$80bn 2025 buyback target** [4].

---

## II. Summer 2025 — The "Goldilocks" Quarter (2Q25)

The 2Q25 release in August 2025 validated the bullish setup. Management opened with "**double-digit revenue and non-IFRS operating profit growth**, as we invest in and also benefit from utilizing AI" [6]. Headline metrics:

| Metric (2Q25) | Value | YoY |
|---|---|---|
| Total revenue | RMB 185bn | +15% |
| Gross profit | RMB 105bn | +22% |
| Non-IFRS operating profit | RMB 69bn | +18% |
| Non-IFRS net profit | RMB 63bn | +10% |

Source: [6]

The composition strengthened further:

- **Domestic Games +17% YoY** — Delta Force expanding into a top-5 DAU / top-3 gross-receipts franchise in China; Peacekeeper Elite DAU +30% YoY; VALORANT China at record DAU [7][8].
- **International Games +35% YoY** (33% in constant currency) — Supercell, PUBG Mobile, and the breakout launch of Funcom's Dune: Awakening (the highest-revenue pay-to-own Steam game globally in its launch week) [7][8].
- **Marketing Services +20% YoY to RMB 36bn**, with AI-powered adtech upgrades and closed-loop Weixin ads as the structural drivers [8].

This was the quarter where the bull case was at its tightest: clear evidence that gen-AI was monetizing *operationally* (ad eCPM, ad load efficiency, game content velocity) without the company having to absorb the kind of capex shock weighing on US hyperscalers.

---

## III. Autumn 2025 — Peak Operational Quarter, but Capex Doubts Surface (3Q25)

The 3Q25 print (November 2025) was, in many ways, the cleanest beat of the year:

| Metric (3Q25) | Value | YoY |
|---|---|---|
| Total revenue | RMB 193bn | +15% |
| Gross profit | RMB 109bn | +22% |
| Non-IFRS operating profit | RMB 73bn | +18% |
| Non-IFRS net profit | RMB 71bn | +18% |
| Weixin + WeChat MAU | 1.4bn | grew QoQ |

Source: [9]

International Games re-accelerated to **+43% YoY (+42% cc)**, helped by upfront revenue recognition on Dying Light: The Beast and acquired-studio consolidation [10]. Clash Royale gross receipts more than tripled YoY. VALORANT Mobile became China's most successful 2025 mobile launch by DAU/gross receipts in its first month [10].

But the under-the-surface narrative shifted on **capex**. CFO John Lo explicitly told analysts that "**the 2025 CapEx will be lower [than] our previous guidance range, but amount would be higher than that of 2024**" [11], explicitly attributing this to "**AI chip availability**" — i.e., GPU supply constraints in China rather than any change of strategic intent. Operating CapEx in 3Q25 was actually **down 18% YoY to RMB 12bn** despite ramping AI ambitions [12]. This was a fork in the road:

- The bull read: Tencent is capital-efficient — getting AI productivity gains without the multi-hundred-billion-RMB capex obligation US peers are signing up for.
- The bear read (which gained traction by Spring 2026): if China-designed ASICs and foreign GPUs both remain rationed, Tencent could be structurally constrained in building the AI agent stack it has signposted, even with the cash to fund it.

Net cash position rose to **RMB 102.4bn (+RMB 27.8bn QoQ)**, with **RMB 19.2bn of buybacks executed in the quarter** [12]. Management also began signalling more active portfolio recycling, with divestments running >US$1bn ahead of new investments YTD as Pony's team trimmed listed holdings into stronger market liquidity.

---

## IV. Winter 2025–Early 2026 — Full-Year Capstone and the AI Reframing (4Q25 / FY25)

The 4Q25 result, released March 2026, closed the year on a strong note but introduced the message that would dominate Q2 sentiment:

| Metric (4Q25) | Value | YoY |
|---|---|---|
| Total revenue | RMB 194.4bn | +13% |
| Gross profit | RMB 108.3bn | +19% |
| Operating profit | RMB 60.3bn | +17% |

Source: [13]

Full-year 2025 was a triumph in games: **+22% revenue growth versus the global games industry's +7%** [16], helped by VALORANT MOBILE (the most successful new mobile game industry-wide by 2025 gross receipts) and Clash Royale's 10th-anniversary revival. Gross margin expanded across all three reporting segments by 2–4ppts. **Tencent repurchased 153m shares for HK$80bn** during 2025, fully meeting the committed program [14].

But the headline takeaway was forward-looking: management said it intends to "**more than double these investments in Hunyuan, Yuanbao and other new AI products in 2026**", explicitly funded out of growing core earnings, and conceptually positioned this AI step-up as analogous to capex / affiliate investment rather than as recurring opex [15]. This signalled that the revenue/profit-growth gap CLSA had flagged back in May 2025 was about to materialize.

---

## V. Spring 2026 — The De-rating (1Q26 and the AI Skepticism Trade)

The 1Q26 print on **May 13, 2026** crystallized the market's new pricing of Tencent. Headline revenue growth slowed visibly to **+9% YoY** (or **+11% adjusted for the later Spring Festival** which shifted game-revenue recognition into future quarters) [17]. Reported non-IFRS operating profit grew **+9% YoY to RMB 75.6bn**, but management drew an explicit "ex-new AI products" line: excluding those investments, op profit grew **+17% YoY to RMB 84.4bn** [18].

Underlying mix remained healthy:

- **Marketing Services +20% YoY to RMB 38bn**, with AI Marketing Plus powering ~30% of total ad spend by Tencent advertisers [21].
- **Business Services +20% YoY**, with Tencent Cloud international revenue **+40% YoY**.
- **Free cash flow RMB 56.7bn (+20% YoY)**; **net cash leapt 37% QoQ to RMB 146.9bn** [20].
- **Hunyuan 3 preview** was launched in April 2026, with Pony Ma claiming top OpenRouter token ranking since April 28 and 10x token usage versus Hunyuan 2 across products [19].

Operating capex jumped to **RMB 31.2bn (+18% YoY, +84% QoQ)** [20], formally beginning the doubled-AI-investment regime telegraphed at the 4Q25 print.

Despite the broad-based beat (non-IFRS net income of CNY67.91bn vs FactSet consensus CNY67.14bn) [24], **the stock did not participate in the broader China tech rally**. StreetAccount, on the day of the print, captured the dichotomy bluntly: *"Alibaba and Tencent miss out tech rally as their AI bets under scrutiny"* [22]. Both names were being read as the relative AI laggards versus DeepSeek-aligned and ASIC-aligned beneficiaries. The follow-on framing the next day — *"Alibaba and Tencent anticipate payoff from AI investment"* [23] — was effectively management's rebuttal to that critique.

Sentiment was further muddied by the macro / geopolitical backdrop in the same week:

- **Trump-Xi meeting** with "largely positive tones" but Xi flagging the Taiwan issue, capping cross-strait risk premia.
- **US clearance for ~10 Chinese firms to buy Nvidia H200 chips**, though "no deliveries have been made so far" — a partial easing rather than a true unlock [25].
- The **Tencent Music / Ximalaya** acquisition received conditional SAMR antitrust approval on May 12, a modest read-through that Beijing's regulatory posture toward the platform group remains accommodative [26].

By the time of the print, the stock was trading in the **HK$460–465 range** [24] — down roughly **~11% from the ~HK$520 level a year earlier** [3], despite EPS growth, record buybacks, and improving free cash flow. The disconnect is the central fact of the year: **fundamentals compounded, sentiment de-rated**.

---

## VI. Synthesis — Why Fundamentals Outran Valuation

Three concurrent forces explain the divergence between strong operating delivery and softer share price:

**1. The CapEx Asymmetry Reframe.** In May 2025, the "low capex intensity" was a bull point — Tencent was perceived to be getting AI margin uplift without hyperscaler-style balance-sheet stress. By May 2026, with US peers spending 80–100% of operating cash flow on AI capex (analyst question on the 1Q26 call) versus Tencent at ~35%, the bear case morphed into: *Tencent might be under-investing rather than capital-efficient*. CFO/CSO commentary that the 2025 capex shortfall was a GPU-supply problem rather than a strategic choice [11] amplified, rather than calmed, this concern.

**2. The Growth-Profit Gap Materialized.** CLSA flagged in May 2025 that "the revenue and profit growth gap may narrow as it steps up AI investment" [1]. That call was vindicated almost on schedule — Q1 2026 was the first quarter in over a year where headline operating-profit growth (+9%) did not exceed revenue growth, with ~RMB 8.8bn of "new AI products" investment being the wedge [18]. Management's "ex-AI" disclosure was a constructive transparency move but underscored that the operating-leverage story was pausing.

**3. AI Narrative Sorting in China Tech.** Through the year, the Chinese AI investment narrative crystallized into a "compute-haves vs compute-have-nots" hierarchy. DeepSeek's emergence (and a reported ~$45bn funding round in May 2026), state-backed semiconductor self-sufficiency programs, and ASIC supply expansion shifted relative interest toward more leveraged AI plays. Tencent's *defensive* qualities — evergreen IP, social-graph moat, FCF — became less in fashion than *offensive* AI exposure.

---

## VII. What's Holding Up the Bull Case Heading Into Summer 2026

Even in the de-rating, several structural facts continued to argue for Tencent's franchise quality:

- Games **+22% in 2025 versus industry +7%** — the gap is too wide to be cyclical [16].
- Marketing Services growing **+20% YoY** for four consecutive quarters with ad load on Video Accounts still **only 4–5% — the lowest in the industry**, giving multi-year runway [21].
- Net cash **+37% QoQ to RMB 146.9bn** in 1Q26, leaving balance-sheet capacity to both fund the doubled AI capex and sustain meaningful buybacks (RMB 7.9bn in 1Q26 alone) [20].
- Hunyuan 3 preview's external traction and 10x internal token usage uptake [19] suggest the AI optionality is no longer purely theoretical, even if the market isn't yet paying for it.

**Bottom line**: the year compressed Tencent's valuation despite expanding its earnings, because the market shifted what it was *willing to pay for* — from defensive cash flow and capital return to offensive AI capex and model leadership. Tencent's task in the coming year is to convert the doubled 2026 AI investment into demonstrable monetization (agentic Weixin, Yuanbao DAU, Tencent Cloud token revenue) fast enough to close the perception gap with both global hyperscalers and Chinese AI pure-plays.

---

**Sources**
[1] Tencent — HC O-PF (Solid games and ad performance) → Accelerated game and ad growth update — CLSA (14 May 2025) — 607959476LinqAlpha.PDF
[2] Tencent SOTP table — CLSA (14 May 2025) — 607959476LinqAlpha.PDF
[3] Tencent share data / target price — CLSA (14 May 2025) — 607959476LinqAlpha.PDF
[4] Gross margin and buyback detail — CLSA (14 May 2025) — 607959476LinqAlpha.PDF
[5] Reiterate HC O-PF — CLSA (14 May 2025) — 607959476LinqAlpha.PDF
[6] Tencent Q2 2025 Earnings Call — Pony Ma opening (13 Aug 2025)
[7] Tencent Q2 2025 Earnings Call — Martin Lau, business review (13 Aug 2025)
[8] Tencent Q2 2025 Earnings Call — James Mitchell, games + ads (13 Aug 2025)
[9] Tencent Q3 2025 Earnings Call — Pony Ma overview (13 Nov 2025)
[10] Tencent Q3 2025 Earnings Call — Martin Lau, games (13 Nov 2025)
[11] Tencent Q3 2025 Earnings Call — John Lo, CapEx commentary (13 Nov 2025)
[12] Tencent Q3 2025 Earnings Call — John Lo, cash flow (13 Nov 2025)
[13] Tencent Q4 2025 Earnings Call — John Lo, financial review (18 Mar 2026)
[14] Tencent Q4 2025 Earnings Call — full-year buyback (18 Mar 2026)
[15] Tencent Q4 2025 Earnings Call — Martin Lau, doubled AI investment (18 Mar 2026)
[16] Tencent Q4 2025 Earnings Call — James Mitchell, FY25 games growth (18 Mar 2026)
[17] Tencent Q1 2026 Earnings Call — Martin Lau, Spring Festival adjustment (13 May 2026)
[18] Tencent Q1 2026 Earnings Call — John Lo, ex-AI op profit (13 May 2026)
[19] Tencent Q1 2026 Earnings Call — Pony Ma, Hunyuan 3 (13 May 2026)
[20] Tencent Q1 2026 Earnings Call — John Lo, balance sheet / CapEx (13 May 2026)
[21] Tencent Q1 2026 Earnings Call — Marketing Services / AI Marketing Plus (13 May 2026)
[22] StreetAccount — Alibaba and Tencent miss out tech rally as their AI bets under scrutiny (13 May 2026)
[23] StreetAccount — Alibaba and Tencent anticipate payoff from AI investment (14 May 2026)
[24] StreetAccount — Tencent reports Q1 non-IFRS net income CNY67.91B vs FactSet CNY67.14B (13 May 2026)
[25] StreetAccount / Reuters — US clears ~10 Chinese firms to buy Nvidia H200 chips (14 May 2026)
[26] StreetAccount — Tencent Music receives conditional SAMR anti-trust approval to acquire Ximalaya (12 May 2026)

## Citations

- [6] **Tencent Holdings Ltd., Q2 2025 Earnings Call, 13-August-2025 8** · external
- [7] **Tencent Holdings Ltd., Q2 2025 Earnings Call, 13-August-2025 8** · external
- [8] **Tencent Holdings Ltd., Q2 2025 Earnings Call, 13-August-2025 8** · external
- [9] **Tencent Holdings Ltd., Q3 2025 Earnings Call, 13-November-2025 7** · external
- [10] **Tencent Holdings Ltd., Q3 2025 Earnings Call, 13-November-2025 7** · external
- [11] **Tencent Holdings Ltd., Q3 2025 Earnings Call, 13-November-2025 7** · external
- [12] **Tencent Holdings Ltd., Q3 2025 Earnings Call, 13-November-2025 7** · external
- [13] **Tencent Holdings Ltd., Q4 2025 Earnings Call, 18-March-2026 8** · external
- [14] **Tencent Holdings Ltd., Q4 2025 Earnings Call, 18-March-2026 8** · external
- [15] **Tencent Holdings Ltd., Q4 2025 Earnings Call, 18-March-2026 8** · external
- [16] **Tencent Holdings Ltd., Q4 2025 Earnings Call, 18-March-2026 8** · external
- [17] **Tencent Holdings Ltd., Q1 2026 Earnings Call, 13-May-2026 8** · external
- [18] **Tencent Holdings Ltd., Q1 2026 Earnings Call, 13-May-2026 8** · external
- [19] **Tencent Holdings Ltd., Q1 2026 Earnings Call, 13-May-2026 8** · external
- [20] **Tencent Holdings Ltd., Q1 2026 Earnings Call, 13-May-2026 8** · external
- [21] **Tencent Holdings Ltd., Q1 2026 Earnings Call, 13-May-2026 8** · external
- [22] **Alibaba and Tencent miss out tech rally as their AI bets under scrutiny** · news — <https://my.apps.factset.com/viewer-fusion/?_doc_id=sa_story_4676666&_doc_date=2026-05-13&_doc_product=SA>
- [23] **Alibaba and Tencent anticipate payoff from AI investment** · news — <https://my.apps.factset.com/viewer-fusion/?_doc_id=sa_story_4679361&_doc_date=2026-05-14&_doc_product=SA>
- [24] **Tencent Holdings reports Q1 non-IFRS net income attributable CNY67.91B vs FactSet CNY67.14B** · news — <https://my.apps.factset.com/viewer-fusion/?_doc_id=sa_story_4677274&_doc_date=2026-05-13&_doc_product=SA>
- [25] **US clears around 10 Chinese firms to buy Nvidia's H200 chips, but no deliveries have been made so far** · news — <https://my.apps.factset.com/viewer-fusion/?_doc_id=sa_story_4679618&_doc_date=2026-05-14&_doc_product=SA>
- [26] **Tencent Music Entertainment Group receives conditional anti-trust approval from SAMR to acquire Ximalaya** · news — <https://my.apps.factset.com/viewer-fusion/?_doc_id=sa_story_4674615&_doc_date=2026-05-12&_doc_product=SA>

