Broker: UOB Kay Hian
Date of Report: Thursday, 14 August 2025
Tencent Holdings Delivers Strong 2Q25 Results: AI Monetization Accelerates Growth in Gaming and Advertising
Overview: Tencent Surpasses Expectations with Robust 2Q25 Performance
Tencent Holdings (700 HK), one of the world’s largest comprehensive internet service providers, reported a stellar set of results for the second quarter of 2025. The company’s performance exceeded both internal and consensus estimates, driven by significant revenue growth, margin expansion, and accelerating monetization of artificial intelligence (AI) across its gaming and online advertising segments.
Key Highlights: Earnings Beat and Upgraded Price Target
- Share Price: HK\$586.00
- Upgraded Target Price: HK\$736.00 (from HK\$650.00), implying 25.6% upside
- Market Capitalization: HK\$5,364,091.3 million (US\$683,323.7 million)
- 52-Week High/Low: HK\$586 / HK\$364
- Major Shareholders: Naspers (24.1%), Ma Huateng (7.7%), Vanguard Group (2.9%)
2Q25 Financial Performance: Growth Across All Segments
Tencent’s 2Q25 revenue rose 14.5% year-on-year (yoy) to RMB184.5 billion, coming in 3% ahead of analyst estimates. Gross margin expanded by 3.6 percentage points (ppt) yoy to 56.9%, also outperforming forecasts. Non-IFRS operating profit surged 18.5% yoy to RMB69.2 billion, with the operating margin climbing 1.3ppt to 37.5%. Non-IFRS diluted earnings per share (EPS) increased 13% yoy, exceeding consensus by 3.5%.
2Q25 Key Financials (RMB million)
|
2Q24 |
1Q25 |
2Q25 |
QoQ |
YoY |
| Revenue |
161,117 |
180,022 |
184,504 |
2.5% |
14.5% |
| Gross Profit |
85,895 |
100,493 |
105,013 |
4.5% |
22.3% |
| Non-IFRS Operating Profit |
58,443 |
69,320 |
69,248 |
-0.1% |
18.5% |
| Non-IFRS Net Profit |
57,313 |
61,329 |
63,052 |
2.8% |
10.0% |
| Non-IFRS Diluted EPS (RMB) |
6.01 |
6.58 |
6.79 |
3.2% |
13.0% |
| Gross Margin (%) |
53.3 |
55.8 |
56.9 |
1.1ppt |
3.6ppt |
| Non-IFRS Operating Margin (%) |
36.3 |
38.5 |
37.5 |
-1.0ppt |
1.3ppt |
| Non-IFRS Net Margin (%) |
35.6 |
34.1 |
34.2 |
0.1ppt |
-1.4ppt |
Segment Analysis: Gaming, Marketing, Fintech, and Cloud Drive Growth
Online Games: AI Propels Domestic and International Expansion
- Online games revenue grew 22% yoy to RMB59.2 billion, exceeding expectations by 3%.
- Domestic games revenue rose 17% yoy, supported by sustained performance from evergreen titles and the successful launch of Delta Force.
- International games revenue, now 31.8% of total game revenue, surged 35% yoy, fueled by robust results from Supercell’s titles, PUBG MOBILE, and new releases like Dune: Awakening.
- AI deployment in content production, virtual characters, and marketing drove user engagement and revenue momentum.
- Deferred revenue increased 13% yoy to RMB120.9 billion, signaling strong underlying momentum for 2025.
Marketing Services: AI-Driven Advertising Outperforms
- Marketing services revenue climbed 19.7% yoy to RMB35.8 billion, supported by strong advertiser demand for Video Accounts and Mini Programs.
- Weixin Search inventory and transaction ecosystem benefited from rising user engagement and continuous AI enhancements to the ad platform.
- AI-powered ad creation, placement, and recommendation improved click-through rates (CTR) and conversion, driving revenue across multiple industry verticals.
Fintech and Cloud: Double-Digit Growth and AI Monetization
- Fintech and business services (FBS) revenue rose 10% yoy to RMB55.5 billion, with fintech services up 12% yoy due to higher consumer loan services and commercial payments.
- Cloud and enterprise business growth was propelled by increased demand for AI-related services such as GPU rental, API token usage, and e-commerce tech solutions.
- Social network revenue increased 6% yoy to RMB32.2 billion, thanks to growth in virtual item sales, live streaming, and music subscriptions.
Margin Expansion and Operational Efficiency
- Value-added services (VAS) gross margin expanded 3ppt yoy to 60.4%, driven by a higher proportion of high-margin domestic game revenue.
- Marketing services gross margin improved to 57.6% (vs 55.6% in 2Q24), aided by high-margin Video Accounts and Weixin Search.
- FBS gross margin climbed 5ppt yoy to 50.9%.
AI Monetization: Mini Games, Delta Force, and Advanced Ad Suite
- Mini Games’ gross receipts jumped 20% yoy in 2Q25 after technology infrastructure upgrades.
- Delta Force achieved more than 20 million average monthly DAU, ranking in the industry’s top five by DAU and top three by gross receipts in July 2025.
- Tencent Ads rolled out a comprehensive AI-driven suite, including ADQ for ad placement and tools such as “Miaosi,” “Miaowen,” “Miaobo,” and virtual digital humans for creative generation and live streaming, all integrated with the “Ruyi” data platform.
Capital Expenditure and Shareholder Returns
- Tencent’s capex for 2Q25 was down 30% quarter-on-quarter to RMB19.1 billion, reflecting slower GPU and server investments.
- The company maintained its 2025-26 capex guidance of RMB93-108 billion, citing adequate chip inventory for model training and multiple inference chip options.
- Share repurchases in 2Q25 totaled HK\$36.5 billion (0.7% of market cap). For 2025, Tencent is on track to buy back at least HK\$80 billion (1.6% of market cap), with HK\$26.4 billion remaining.
Earnings Revisions and Valuation
- 3Q25 and full-year 2025 revenue estimates were raised by 3% and 1%, respectively, reflecting expected 11.6% and 12.6% yoy growth.
- Non-IFRS net profit forecast for 3Q25 was increased by 3%, while 2025 projections remained unchanged, implying 8%/12% yoy profit growth and net margins of 34.5%/34% for 3Q25/2025, respectively.
- Primary risks include regulatory headwinds and slower game revenue growth.
- The revised target price of HK\$736.00 is based on a 2026F sum-of-the-parts (SOTP) valuation and implies 22x 2026F PE. Tencent currently trades at 17.3x 2026F PE, which is below its historical average of 25.3x.
Key Financial Projections (RMB million)
| Year |
2023 |
2024 |
2025F |
2026F |
2027F |
| Net Turnover |
609,015 |
660,257 |
743,317 |
801,681 |
859,349 |
| EBITDA |
176,654 |
221,456 |
255,108 |
294,807 |
322,919 |
| Operating Profit |
163,633 |
208,099 |
241,151 |
280,250 |
307,762 |
| Net Profit (Reported) |
111,057 |
173,882 |
195,505 |
232,562 |
253,294 |
| EPS (Fen) |
1,588.8 |
2,137.8 |
2,532.0 |
2,942.7 |
3,192.5 |
| PE (x) |
33.7 |
25.1 |
21.2 |
18.2 |
16.8 |
| P/B (x) |
6.3 |
5.1 |
4.0 |
3.4 |
2.9 |
| EV/EBITDA (x) |
27.4 |
21.8 |
18.9 |
16.4 |
15.0 |
| Dividend Yield (%) |
0.6 |
0.9 |
1.1 |
1.2 |
1.3 |
| Net Margin (%) |
18.2 |
26.3 |
26.3 |
29.0 |
29.5 |
| ROE (%) |
14.5 |
19.5 |
18.0 |
17.8 |
16.7 |
Valuation Breakdown: Sum-of-the-Parts Analysis
2026F SOTP Valuation
| Segment |
2026F Revenue (RMBm) |
2026F Non-GAAP Earnings (RMBm) |
Valuation Multiple |
Segment Value (RMB bn) |
Fair Value/Share (HK\$) |
| Online Game |
249,040 |
95,897 |
20x PE |
1,918 |
232 |
| Social Networking |
138,628 |
53,381 |
22x PE |
1,174 |
142 |
| Online Ads |
170,024 |
62,786 |
22x PE |
1,381 |
167 |
| Payment |
184,154 |
25,781 |
15x PE |
387 |
47 |
| Cloud |
59,836 |
– |
5x PS |
299 |
36 |
| Total EV |
557,682 |
237,845 |
19x PE |
4,474 |
624 |
| Net Cash/Share (HK\$) |
|
32 |
| Target Price (HK\$) |
|
736 |
Share Price Catalysts and Strategic Outlook
- Continued improvement in online advertising, particularly WeChat video accounts.
- Potential for further game license approvals.
- Enhanced collaborations with internet platform operators within the WeChat ecosystem.
Tencent’s innovation and focus on AI monetization position it for sustainable growth. Its robust balance sheet, strategic share buybacks, and diversified revenue streams further reinforce its investment appeal.
Conclusion: Strong Buy Maintained Amid AI-Led Growth
UOB Kay Hian maintains a BUY rating on Tencent, with a higher target price of HK\$736.00. The company’s current valuation (17.3x 2026F PE) is below its historical mean, offering attractive upside potential as AI monetization in games and advertising accelerates. Investors should note regulatory risks and potential volatility in gaming revenues but can remain optimistic about Tencent’s leadership in China’s digital and AI sectors.
