Goldman Sachs: Tencent's valuation is not demanding and it remains the most certain AI application beneficiary stock in China.

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Goldman Sachs reiterated its “Buy” rating on Tencent Holdings in its latest research report and raised its target price, believing that although the company’s share price has risen sharply so far this year, its valuation is not demanding compared to global peers. Tencent remains the most certain beneficiary of AI applications in the Chinese market.

According to Chasewind Trading Desk, in a report released on the 12th, Goldman Sachs analysts including Ronald Keung raised Tencent’s 12-month target price from HKD 701 to HKD 770. Year to date, Tencent’s share price has risen 51%, outperforming the Hang Seng Tech Index’s 44% increase in the same period.

Goldman Sachs believes that despite renewed investor concerns about geopolitical risks, Tencent’s fundamentals remain strong. Its valuation levels, monetization potential in multiple AI application areas, and stable shareholder return policy together form its core investment logic.

The bank expects that when Tencent releases its third-quarter results on November 13, the market will focus on prospects for its AI applications and capital expenditures, foundational and multi-modal large model capabilities, and the growth visibility of core businesses such as gaming and advertising. Tencent’s Q3 revenue is expected to grow 13% year-on-year, and earnings per share are expected to grow 18% year-on-year, with the latter’s growth rate 1.5 times that of revenue growth. This is mainly driven by high-margin segments such as advertising, gaming, and consumer finance, as well as overall operating leverage.

Valuation still has room, below global peers

Although the share price has undergone a round of re-rating, Goldman Sachs believes that Tencent’s valuation is still not demanding. The report pointed out that Tencent’s current valuation corresponds to a 2026 expected non-IFRS P/E ratio of 19x, or 16x if excluding its investment portfolio. Internationally, its IFRS-based P/E is 22x, below tech giants like Meta (24x) and Google (23x).

Goldman Sachs gives Tencent’s share price valuations under base, bull, and bear-case scenarios at HKD 770, HKD 846, and HKD 541, respectively, viewing the risk-reward as skewed positive. Analysts believe Tencent’s assets are relatively under-monetized, while AI will bring multiple new monetization drivers to all its business lines, leaving ample room for future growth. At press time, Tencent’s share price was HKD 629 per share.

AI fully empowers, Hunyuan model achieves breakthrough

Goldman Sachs regards Tencent as “one of the best-positioned core AI application targets in China’s internet industry”; the core logic is that AI can empower almost all of Tencent’s business lines, including gaming, advertising, fintech, cloud services, and e-commerce, realized through its unique WeChat ecosystem and global gaming assets.

The report especially highlighted Tencent’s latest breakthroughs in AI. Its self-developed Hunyuan Image 3.0 model recently ranked No. 1 on the authoritative LMarena text-to-image leaderboard, beating leading global peers, including models from OpenAI. This marks the first time Hunyuan has topped a global benchmark. In addition, its AI application “Yuanbao” app achieved a 12% quarter-on-quarter DAU increase in Q3 (according to QuestMobile).

Goldman Sachs sees that, learning from Kakao’s collaboration with OpenAI integrating its model into KakaoTalk, WeChat is expected to explore more AI agent functions beyond AI search and productivity features, further strengthening its “super-app” ecosystem position.

Raised capex and cloud business forecasts

Based on an optimistic view of AI demand, Goldman Sachs raised Tencent’s capex forecasts. The bank revised up the total capex forecast for Tencent's FY2025-FY2027 from RMB 300 billion to RMB 350 billion, and expects annual capex for 2025, 2026, and 2027 to reach RMB 100 billion, RMB 117 billion, and RMB 129 billion, respectively.

Goldman Sachs believes that the increase in domestic chip supply in the coming years will support Tencent’s AI inference needs. Increased capex will directly benefit its cloud business. As a result, Goldman Sachs sharply raised its revenue growth forecast for Tencent Cloud: it now expects growth rates of 11%, 25%, and 20% in 2025, 2026, and 2027, far higher than previous projections of 8%, 7%, and 6%. With these higher growth assumptions, Goldman also raised its valuation for Tencent Cloud from HKD 38 per share to HKD 48 per share.

Steady growth in gaming and ads, with sustained margin expansion

Goldman remains optimistic about Tencent’s traditional core businesses as well.

Gaming: Game revenue for Q3 and full-year 2025 is expected to grow 16% and 18% year-on-year, respectively. The growth is powered by strong performance from new titles such as “Delta Force: Hawk Ops,” and solid operations of evergreen games like “Honor of Kings.” Major releases like “Path of Exile 2” also provide a clear roadmap for future growth.Advertising: Marketing services revenues for Q3 and full-year 2025 are both expected to grow 19% year-on-year. AI-driven ad tech upgrades are improving click conversion rates, while higher ad load rates for video channels and new ad inventories such as WeChat search ads will continue driving ad revenue growth.Margins: Goldman expects Tencent’s margins to continue expanding, with operating profit margin (OPM) rising by 212 basis points in Q3 2025. However, as AI-related GPU depreciation costs, R&D, and marketing spending rises, the gap between profit growth and revenue growth may gradually narrow in the future.

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The above highlights are from Chasewind Trading Desk.

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