Tencent Holdings (00700): 2Q26 Review: AI Business Running at Full Speed
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Key Views
AI momentum is building: the Hunyuan Hy3 model ranks among OpenRouter's top three by token usage, and WorkBuddy and CodeBuddy reached 27.5 million users in June. Tencent Cloud revenue growth accelerated from high-teens to over 20% on GPU rental, MaaS and AI-tool demand. Capex jumped to RMB 52.8 billion in 2Q26 (1Q26: RMB 31.9 billion), swinging free cash flow to -RMB 13.8 billion; full-year capex may exceed RMB 200 billion. Adjusted operating margin fell 50bps YoY to 37% (42% excluding AI products vs 39.2% in 2Q25). 2026-2028E EPS was cut 15%-18%.
Outlook
A larger Hunyuan Hy4 model is due later this year; 2H26 capex should run above the Q2 rate. Advertising is expected to sustain above-20% growth; 3Q26 and FY2026 revenue are forecast to grow 10% YoY, with 2026 domestic/international games up 12.0%/0.4%.
Recommended Securities
Tencent Holdings (700 HK): Buy reiterated, target price HKD 780.00 (cut 1% from HKD 790.00), implying 27x 2026E P/E and 69% upside versus HKD 461.60. Key risks: weak macro, slower monetization, low-return investments, regulation, competition.