Goldman Sachs trims Tencent target to HKD670 as AI capex pressures EPS

Goldman Sachs trimmed its 12-month target price on Tencent to HKD670 from HKD700, maintaining a Buy rating as the company's AI infrastructure spending pressures near-term earnings.

"Tencent's pace of AI investment has been more aggressive than expected," Goldman Sachs analysts wrote, noting the company is prioritizing computing power for training and applications of its own Hunyuan models rather than leasing it out through AI cloud services.

The broker raised its capex forecasts for 2026-28 to RMB210 billion, RMB245 billion and RMB247 billion, from RMB151 billion, RMB165 billion and RMB174 billion previously. Tencent's second-quarter results were broadly in line, with resilient growth in advertising and domestic gaming, though operating capital expenditure surged 190 percent year-over-year to RMB51.8 billion, pushing free cash flow to negative RMB13.8 billion.

Tencent shares fell 3.2 percent intraday, with the stock down 26 percent year-to-date. Forward PE declined from 18x at the start of the year to about 13x, reflecting market concerns over short-term earnings pressure and the time required for AI investments to deliver returns. Short selling data showed HK$2.01 billion in short positions, a ratio of 15.9 percent of turnover.

Goldman Sachs said the market has compared Tencent's investment cycle with that of US internet peers such as Meta. The broker expects short-term sentiment to require further progress on projects including Hunyuan models, WorkBuddy, CodeBuddy and the WeChat AI agent Xiaowei before improving.

Tencent's second-quarter earnings, reported Aug. 12, showed revenue of RMB204.8 billion, up 11 percent year-over-year, with gross profit rising 13 percent to RMB118.4 billion. Non-IFRS operating profit excluding new AI products grew 19 percent to RMB86.1 billion, while the company's core franchises continued to generate operating leverage. Marketing services revenue climbed 22 percent to RMB44 billion, and domestic games revenue rose 17 percent, helped by titles including Delta Force and Valorant PC.

The company's AI-native products are showing early traction. WorkBuddy, Tencent's AI office productivity workspace, and CodeBuddy, its coding tool, are achieving breakout user growth and lead the China market based on monthly interactions, according to management. Hunyuan 3 is in production, with Hunyuan 4 expected later in 2026. Management has said the current capex surge is tied to model training and inference needs, with additional capacity expected to support Tencent Cloud rental services later in 2026 and into 2027.

The target cut reflects a trade-off between near-term EPS dilution and long-term AI positioning. Goldman Sachs identified future launches of Hunyuan models, WorkBuddy user retention and payment ratios, Xiaowei adoption, and Tencent Cloud's positioning as one of China's top three hyperscale cloud providers as key share price drivers over the next 6-12 months.

This article is for informational purposes only and does not constitute investment advice.