Morgan Stanley has released a research report stating that Tencent (00700) maintains a solid core business foundation. However, due to increased investment in artificial intelligence, the firm expects earnings to be roughly flat from the second half of 2026 to 2027. As a result, the price target has been cut from HK$650 to HK$550, while the "Overweight" rating is retained.

The bank forecasts that Tencent's AI investment will accelerate in the second half of the year, primarily focusing on speeding up the development of the Hunyuan (Hy) model, with Hy4 expected to launch later this year, as well as expanding into productivity AI through WorkBuddy and CodeBuddy. Morgan Stanley has raised its capital expenditure estimates for Tencent for 2026 and 2027 to 200 billion yuan each year. Consequently, the non-IFRS operating profit forecast for 2026 has been reduced by 1.8%, and the 2027 forecast has been cut by 12.3%. The bank expects the non-IFRS operating profit margin to narrow from 37.3% in 2025 to 35.5% in 2026 and 32.4% in 2027.

The report notes that Tencent's second-quarter results were broadly in line with expectations. Revenue grew 11% year-on-year, beating forecasts, driven mainly by the advertising business. Non-IFRS operating profit increased 9.2% year-on-year. The bank anticipates that revenue growth momentum will continue in the third quarter, with a 10.6% year-on-year increase, but the non-IFRS operating profit growth rate will slow to 2.7% due to the impact of AI investment.

Morgan Stanley believes that Tencent's core business is among the strongest in the Chinese internet sector, possessing a durable competitive advantage. Furthermore, AI empowerment in its WeChat, gaming, and advertising businesses is continuously strengthening. While increasing AI investment may impact short-term earnings, it can create substantial long-term value. At its current price, Tencent trades at approximately 13.1 times the forecast 2026 price-to-earnings ratio, which is at the low end of its historical range. The bank's target price implies a 15.6 times forward price-to-earnings ratio for this year.