Bank of America: Tencent's AI is undervalued, significantly raises capital expenditure forecasts for the next three years.

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Tencent Holdings' investment in AI is surpassing previous market expectations. In its latest research report, BofA Securities has sharply raised its capital expenditure forecasts for Tencent from 2026 to 2028, while maintaining a buy rating, believing that the market underestimates Tencent's leadership position in China’s AI agent orchestration layer.

According to Chasing Wind Trading Desk, BofA Securities issued a report on July 13 in which analyst Alex Liu raised Tencent's 2026-2028 capital expenditure forecasts by 23% to 25%, adjusting them to 185 billion, 225 billion, and 250 billion yuan respectively. The report points out that Tencent’s leading position in China’s AI agent orchestration layer has been overlooked by the market, and WorkBuddy now ranks first domestically in terms of user scale.

Higher AI investment puts some pressure on profit forecasts. BofA has lowered Tencent’s non-IFRS diluted EPS for 2027-2028 by 3% and 6% respectively, while keeping the 2026 EPS basically unchanged. The report notes that excluding the impact of AI investments, Tencent’s Q2 2026 year-on-year adjusted operating profit growth could reach 14%.

Q2 Results Outlook: Stable Gaming, Accelerating Ads, Cloud Services Set to Accelerate

BofA expects Tencent’s Q2 2026 total revenue to grow by 8.8% year-on-year (consensus is 10%), adjusted net profit to grow by 4.7% year-on-year (consensus is 9%).

Gaming: The report expects domestic game revenue to grow 10% year-on-year, mainly driven by incremental income from "Delta Force" and the stable performance of "Honor of Kings"; International gaming revenue is expected to slow to 9% year-on-year due to a high base effect.

Advertising: BofA expects continued ramp-up in Video Account ads, driving online ad revenue growth of 18% year-on-year, with relatively high gross margins. In Fintech and Business Services (FBS), fintech revenue is expected to grow 3% year-on-year, but cloud services are set to accelerate to 25% year-on-year growth, with overall FBS revenue expected to rise 8% year-on-year.

Accelerating AI investment: Capital Expenditure Sharply Raised, Short-Term Profitability Under Pressure

BofA expects Tencent’s Q2 2026 AI-related operating expenditure to reach 10.5 billion yuan, up from 8.8 billion yuan in Q1, reflecting the company's continued ramp-up of AI infrastructure and model R&D.

Regarding capital expenditure, BofA has raised forecasts for 2026-2028 from the previous 150 billion, 180 billion, and 200 billion yuan to 185 billion, 225 billion, and 250 billion yuan, with an increase of 23% to 25%. This adjustment directly leads to a significant narrowing of free cash flow forecasts—2026 free cash flow is now predicted to be about 67.2 billion yuan, far below the actual value of 215.6 billion yuan in 2025.

The report also lowers 2027-2028 non-IFRS net profit forecasts: 2027 from 287 billion yuan to 279.3 billion yuan, 2028 from 312 billion yuan to 292.7 billion yuan, a decrease of 3% and 6% respectively.

Positive AI Progress: Agent Deployment Undervalued by Market

BofA believes that Tencent’s recent improvements in foundational models and beta launch of WeChat AI agents may turn market sentiment from "pessimistic" to "optimistic".

The report specifically points out that the market is underestimating Tencent’s leadership in China’s AI Agent Orchestration layer. Tencent’s WorkBuddy currently ranks first in user scale. BofA considers this layer to have significant strategic value, serving both as an entry point for AI model distribution and as an accumulation of valuable user-model interaction data.

On the monetization prospects for WeChat AI agents, BofA thinks Tencent has two core advantages: first, it can efficiently deliver AI services at relatively low token cost thanks to its deep AI infrastructure and lightweight WeChat-specific models; second, it has the potential to establish win-win monetization frameworks with ecosystem partners.

BofA maintains its target price of HKD 780 based on SOTP valuation methodology. Specific assumptions include valuing online games at 15x PE, value-added services (non-games), online advertising, and fintech each at 20x PE, cloud and business services at 5x PS, plus investment holdings and net cash (about HKD 107/share after a 10% discount).

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