Jefferies: Cuts Tencent (00700) target price to HK$711, maintains "Buy" rating.

Jefferies issued a research report cutting Tencent's (00700) target price by about 5%, from HK$750 to HK$711, to reflect the latest business and industry trends and changes in sector valuations. Jefferies expects Tencent to increase its investment in artificial intelligence (AI), while becoming more cautious on its advertising and fintech businesses, but it remains bullish on the company's diversified growth drivers and AI development strategy, maintaining a "Buy" rating. Jefferies broadly kept its third-quarter revenue forecast for Tencent unchanged, expecting revenue to grow 8.6% year-on-year to RMB209 billion, slightly below the market's expected 9% growth. However, the brokerage raised its estimates for Tencent's AI spending in the second half of this year and in 2027, with related investments covering computing power, models and application development, as well as using AI to improve the efficiency of existing businesses. At the same time, amid macroeconomic uncertainty, Jefferies adopted more conservative forecasts for Tencent's advertising and fintech services. The brokerage estimates third-quarter marketing services revenue will grow 18% year-on-year, slightly below its previous forecast and the market's expectation of 19%; fintech and business services revenue is expected to grow 8%, below the expected 9.2%. On the gaming business, Jefferies expects online games revenue to grow 8% year-on-year, in line with market expectations. Among this, international games are expected to decline about 3% year-on-year, mainly factoring in the appreciation of the renminbi, the high base created by buy-to-play game launches in the same period last year, and the inclusion of fast-growing in-app advertising revenue from Miniclip under marketing services rather than international games revenue. Based on increased AI investment and weaker growth forecasts for some businesses, on a non-IFRS basis, Jefferies expects operating profit to fall about 4% year-on-year to RMB69.6 billion; profit is also expected to decline 8% to RMB64.9 billion. Jefferies said the market will focus on the following 12 areas: the latest progress of its AI strategy, and market feedback on the latest development trends of WorkBuddy; the market is also watching user feedback on WeChat AI testing; the competitive landscape of AI models, and market feedback after the official release of HY4; domestic online game strategy, including revitalizing existing games such as "Honor of Kings" and PKE, as well as the latest progress of emerging game IPs; the outlook for the international games business; the outlook for the advertising business, and trends across different industry categories; fintech revenue trends, including payment and non-payment businesses; the outlook for cloud revenue; capital expenditure and free cash flow (FCF) trends; operating expense trends; AI commercialization opportunities and latest progress across different business segments; profit growth in the second half of 2026 and 2027; and shareholder capital returns.