---
endpoint: analytics
pattern: Internet
status: done
latency_ms: 180450
conversation_id: 6462c234-1cdc-4b6c-a9d0-11c0c76b4e7c
citations: 0
created: 2026-05-31 18:18:52Z
---

# What is Tencent’s core business franchise and the key components of its operating model?

# Tencent (700 HK) — Core Business Franchise & Operating Model

Based on internal CLSA research (May 2025, post-1Q25 results), Tencent operates a three-segment platform model anchored by the Weixin/QQ super-app ecosystem. Total revenue reached **Rmb180.0bn in 1Q25 (+12.9% YoY)** with adjusted EBIT of **Rmb69.3bn (+18.3% YoY)** and adj. EBIT margin of **38.5%**, with CLSA forecasting Rmb739bn FY25CL revenue and Rmb275.8bn adj. EBIT [1][2].

---

## I. The Core Franchise: A Weixin/QQ-Anchored Super-App Ecosystem

Tencent's franchise rests on **two foundational user assets** that are the gateway for every monetisation engine downstream:

| User Asset | 1Q25 MAU | Role |
|---|---|---|
| **Weixin (WeChat)** | 1,402m (+3.2% YoY) | Primary super-app — social, payment, content, transactions, Mini Programs, Video Accounts, Search |
| **Mobile QQ** | 534m | Secondary social / messaging franchise (younger demographic) |
[2]

Around this user base, Tencent runs the **world's largest gaming franchise** (domestic + international), the **dominant Chinese ad platform tied to Weixin**, and **fintech + cloud services** layered on the payment rails — with a **strategic-investment portfolio** (Naspers/Prosus-style: stakes in Meituan, Pinduoduo, Kuaishou, JD, Tesla, Spotify, plus subsidiaries TME, Huya) sitting alongside the operating businesses.

---

## II. Three Reporting Segments (the operating model)

### 1. Value-Added Services (VAS) — Rmb92.1bn in 1Q25 (+17.2% YoY)

VAS is the largest profit pool and splits into two sub-engines:

**(a) Online Games — Rmb59.5bn in 1Q25 (+23.7% YoY)** [2]
- **Domestic games: Rmb42.9bn (+24.3% YoY)** — evergreen franchises *Honour of Kings* and *Peacekeeper Elite* plus new hits *DnF Mobile* and *Delta Force*; HoK gross receipts hit a record high on Year-of-Snake outfits, PKE expanded into extraction-shooter mode driving DAU growth, *Valorant* gross receipts and DAU doubled YoY [3].
- **International games: Rmb16.6bn (+23% YoY; +22% ex-FX)** — driven by *Brawl Stars*, *Clash Royale*, and *PUBG Mobile* (gross receipts +16% YoY) [3]. International games published under the *Level Infinite*, *TiMi*, and *Supercell* labels; pipeline includes *Path of Exile 2*, *Delta Force* console, *Dune Awakening*.

**(b) Social Networks — Rmb32.6bn in 1Q25 (+6.9% YoY)** [6]
- Drivers: app-based game virtual items, music subscription revenue, and mini-game platform service fees.
- **Tencent Video** — 117m paying users (+1% YoY), supported by self-commissioned dramas (Guardians of the Dafeng was the industry's #1 drama in 1Q25) [7].
- **Tencent Music Entertainment (TME)** — Rmb7.4bn (+9% YoY); music subscription Rmb4.2bn (+17% YoY), avg subs 123m (+8% YoY) [7].
- **Huya** — Rmb1.5bn (flat YoY) [7].
- **Video Accounts / Mini Shops / Official Accounts** — rapidly growing user-time and GMV channels embedded inside Weixin [7].

**VAS gross margin: 59.6% in 1Q25** (+2.3ppt YoY), buoyed by high-margin domestic-games and mini-games platform fees [8].

### 2. Online Advertising — Rmb31.9bn in 1Q25 (+20.2% YoY)

The "marketing-services" engine running on Tencent's first-party inventory:
- **Inventory mix**: Video Accounts (ad revenue +60% YoY), Mini Programs (closed-loop mini-dramas/mini-games marketing), Weixin Search (rising commercial queries + CTR) [4].
- **Ad tech stack**: LLM/AIGC-enabled image-ad generation, video-ad editing, digital-human solutions for livestreaming/merchants, and deeper merchandise/user-interest modelling for ranking [4][13].
- **Gross margin: 55.5%** (+0.8ppt YoY), lifted by high-margin Video Accounts and Weixin Search [8].

### 3. FinTech and Business Services (FBS) — Rmb54.9bn in 1Q25 (+5.0% YoY)

A two-part franchise built on top of the Weixin payment graph:
- **Fintech (consumer)** — Weixin Pay (commercial payment volume slightly down YoY in 1Q25 but trend improved in April), **LiCaiTong** wealth management (now LLM-augmented), and consumer-loan services. Low-single-digit YoY growth [5].
- **Business Services (mostly Tencent Cloud)** — resumed teens-% YoY growth; AI-related Tencent Cloud revenue grew rapidly on GPU/API/platform demand; e-commerce technology service fees also contributed [5].
- **FBS gross margin: 50.3%** (+4.7ppt YoY) — the largest margin uplift across segments, on higher-margin consumer-loan/wealth contribution and cloud cost efficiency [8].

---

## III. Segment Revenue Mix (CLSA 25CL forecast)

| Segment | 2024A (Rmbm) | 25CL (Rmbm) | 25CL YoY | 25CL Gross Margin |
|---|---|---|---|---|
| VAS — Social Networks | 121,500 | 128,834 | +6.0% | — |
| VAS — Online Games (Domestic + Intl) | 197,668 | 232,099 | +17.4% | — |
| **Value-Added Services (total)** | **319,168** | **360,933** | **+13.1%** | **58.5%** |
| Online Advertising | 121,374 | 142,555 | +17.5% | 56.5% |
| FinTech & Business Services | 211,956 | 227,261 | +7.2% | 52.0% |
| Others | 7,759 | 8,302 | +7.0% | — |
| **Total revenue** | **660,257** | **739,051** | **+11.9%** | **55.5%** |
[1]

---

## IV. Key Components of the Operating Model

1. **Two-sided ecosystem flywheel** — Weixin/QQ MAU base feeds time and data to games (VAS), Video Accounts/Mini Programs/Search (Ads), Weixin Pay (Fintech), and Tencent Cloud (Business Services). Each engine reinforces user engagement back to the platform [2][4].

2. **Games as the lead profit pool** — A portfolio strategy of *evergreen titles* (HoK, PKE, CF, *PUBG Mobile*) supplemented by *new blockbusters* (DnF Mobile, Delta Force, Path of Exile 2) and an *international expansion engine* via Level Infinite / TiMi / Supercell publishing studios [3].

3. **AI as the cross-segment efficiency and growth lever** — Tencent is *stepping up* AI investment, with the company explicitly signalling that the revenue/profit growth gap may narrow as a result [9]. AI is being deployed across:
   - **Ads**: targeting, recommendation, creative generation, digital humans [4][13]
   - **Games**: engagement in evergreen titles [9]
   - **Cloud**: GPU/API/platform monetisation [5]
   - **Weixin**: *Yuanbao* as a Weixin contact; Weixin Search powered by HunYuan Turbo S, HunYuan T1, and DeepSeek R1 (grayscale "AI Search" tests); AI image/video generation tools for Official Accounts and Video Accounts; AI coding assistants reducing Mini Program dev time [14]. Future direction is Agentic AI inside the Weixin ecosystem.

4. **Margin expansion through mix-shift and operating leverage** — 1Q25 overall gross margin rose 3.2ppt YoY to **55.8%**, with adj. EBIT margin up 1.8ppt to **38.5%**. The lift is structural: high-margin domestic games, Video Accounts/Search ads, and wealth-management/payment-services efficiency all moving in the right direction simultaneously [8].

5. **Capital return + buyback** — Tencent repurchased ~**43m shares for HK$17.1bn in 1Q25** and targets at least **HK$80bn of buybacks in 2025** [8].

6. **Strategic-investment portfolio** — Treated as a separate value pillar; CLSA values it at a 15% discount to market cap (≈**US$92bn / HK$77/sh**) in its SOTP. Associates contributed Rmb7.6bn of non-IFRS profit in 1Q25 vs Rmb5.5bn in 1Q24 [8][12].

7. **Investment thesis (CLSA framing)** — (i) strong game pipeline + global expansion, (ii) ample room in social networks via mini-games and Video Accounts livestreams, (iii) ad market-share gains from Video Accounts traffic, and (iv) fintech upside from LLM deployment [10].

---

## V. How CLSA Values the Pieces (SOTP, HK$645 TP)

| Pillar | Method | Value (US$bn) | HK$/share |
|---|---|---|---|
| Social, Games, Ad | Implied 14.8x 26CL adj PE | 541 | 456 |
| Fintech | 3x 26CL P/S | 50 | 42 |
| Cloud | 5x 26CL P/S | 34 | 29 |
| Net cash | — | 48 | 41 |
| **Core businesses (DCF)** | **WACC 12.4%, terminal 1.5%** | **673** | **567** |
| Strategic investments | 15% discount to market cap | 92 | 77 |
| **Total SOTP** | Implied 19.8x 26CL adj PE | **765** | **645** |
[11][12]

The SOTP makes the operating-model breakdown explicit: roughly **~70% of equity value sits in the core operating businesses** (Social/Games/Ads + Fintech + Cloud + net cash), with the **investment portfolio** as a separate, discounted pillar.

---

**Sources**
[1] Tencent — HC O-PF (Accelerated game and ad growth), Figure 33 Income Statement — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[2] Tencent — HC O-PF, Figure 1 Key Quarterly Financials (1Q24–1Q25) — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[3] Tencent — HC O-PF, Strong game performance in both China and overseas — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[4] Tencent — HC O-PF, Ad revenue further accelerated growth — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[5] Tencent — HC O-PF, Business services resumed teens-% growth — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[6] Tencent — HC O-PF, Social network maintained steady growth — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[7] Tencent — HC O-PF, Tencent Video / TME / Huya / Video Accounts detail — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[8] Tencent — HC O-PF, Gross margin continued to expand / buyback target — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[9] Tencent — HC O-PF, Tencent to step up AI investment — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[10] Tencent — HC O-PF, Investment thesis — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[11] Tencent — HC O-PF, Valuation details (DCF assumptions) — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[12] Tencent — HC O-PF, Figure 31 SOTP — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[13] Tencent — HC O-PF, Ad platform AI capabilities — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF
[14] Tencent — HC O-PF, Weixin × DeepSeek / HunYuan integration — CLSA, 14 May 2025 — 607959476LinqAlpha.PDF

