维持买入评级，目标价下调至720港元：核心业务利润率持续改善

InternetSoftware&Services Higher Al spending offset by core business margin expansion• Model development focus on better supporting Tencent'sproductsMaintainBuyandtrimTPtoHKD720 (fromHKD750) 720.00750.00 to see Tencent print a strong uptick in operating profit margin (OPM) excluding new Alincreased self-developed game contribution in the VAS segment; as for FBS, afavourable revenue mix shiftin fintech and growing scale of cloud business should helpWekeep ourgroupmargin assumptionslargely unchanged.We expectAl spending inbelow). We are less worried about a shortage in CPU and networking chips,as Tencenthas long-term business relationships with suppliers given the scale of its core businessAfter launching the HY3.0 preview, we expect Tencent to stay focused on improving costoffers a valuablefeedback loop which can in turn improve its iteration pace to better serveTencent'sproductsandecosystemovertime.Moreover,bothCodeBuddyandrateamongactive/payingusers.TencentCloudsawrapidgrowthintokensinrecentweeks as a result. Lastly, slight miss in games attributable to timing of booking of revenueis not a cause for concern, in our view. In fact, evergreen titles like Honor of Kings,Peacekeeper Elite,and Delta Force all saw record-highgross billings in 1Q26contributing a teens percentage growth in domestic game gross billings. We expect anuptick in domestic games growth in the rest of 2026. LiftingAlspending: We lift our2026e capex from RMB92bn (11% of revenue)toRMB134bn (16%of revenue)as the 1Q26 capex surprised on theupside andmanagementexpects capexto increasemeaningfully in2H26oncemoredomesticchipsbecomeavailable.Wealso lift2026ecostsand expenses fornewAl products (Hy,Yuanbao, CodeBuddy, WorkBuddy,and QClaw)to RMB40bn (from RMB36bn) in 2026e.But we keep total non-IFRS operating profit (OP) largely unchanged as we expect marginexpansion from VAS andFBS to largely absorb the incremental spending.That said, wetrimnon-IFRSnetprofit(NP)in2026e-28eby3%givenlowershareofprofitsfromJV/associates and interest income arising from higher capex. We trim our TP to HKD720from HKD750. Charlene Liu*HeadofInternetandGamingResearch,AsiaPacificThe Hongkong and Shanghai Banking CorporationLimited, Singapore Branchcharlene.r.liu@hsbc.com.sg+6566580615 Ritchie Sun*,CFAAnalyst,InternetResearchThe Hongkong and Shanghai Banking Corporation Limitedritchie.k.h.sun@hsbc.com.hk+85228224392 1Q26result:Toplinewas2%belowconsensus,as thelatertimingof theChineseNewYear led to a shift of a portion of games/item sales revenue out of 1Q26.Excluding thisimpact, topline would have grown 11% yoy (in line). GP and non-IFRS OP came in largelyin line with consensus. Within revenue, international games, domestic games and socialnetwork missed by 5%/4%/5% respectively,while marketing services beat by1%.Tencent repurchased HKD7.6bn shares in 1Q26. In 1Q26, the company incurredRMB32bncapex(16%ofrevenue),upfromRMB20bn(10%ofrevenue)in4Q25.ItspentRMB8.8bn in new Al products. Excluding that, non-IFRS OP grew 17% yoy. *Employed by a non-US affliate of HSBC Securities (USA) Inc, and isnot registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and ShanghaiBankingCorporationLimited,SingaporeBranch Disclosures&Disclaimer This reportmust be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it. ViewHSBC Global InvestmentResearch at:https://www.research.hsbc.com Source: HSBCNote: Priced at close of 13 May 2026 1Q26 topline was 2% below consensus, given 5% miss from VAs (related to later timing ofChinese New Year leading to a shift of a portion of games/item sales revenue out of 1Q26). Excluding this impact,topline would have grownby11%yoy (in line).GP and non-IFRSOP came in largely in line with consensus. Within revenue, international games, domesticgames and social networkmissedby5%/4%/5%respectively,whilemarketing services beatby1%.Non-IFRS excluding new Al products came in at RMB84.4bn, up by 17% yoy.Non-IFRSOPMexcludingnewAlproductsincreasedto43.0%from39.9%lastyear.ItspentRMB8.8bninnew Al products (HY,Yuanbao, CodeBuddy,WorkBuddy,Qclaw) in1Q26.TencentrepurchasedHKD7.6bnshares in1Q26.In1Q26,thecompanyincurredRMB32bncapex(16%of revenue), up from RMB20bn (10% of revenue) in 4Q25. In March 2026, Tencent's totalheadcountgrewby5%yoy (same rate as in December2025). Domestic games Revenue grew by 6% (consensus: +11%) and the growth rate is slower than gross billings (GB)(up teens percentage rate yoy). The gap is due to the later timing of Chinese New Year in 2026growth in GB is driven by Honor of Kings (HoK), Peacekeeper Elite (PKE), Delta Force (nowqualified as evergreen game), and Valorant mobile.HoK, PKE and Delta Force have achievedrecord-high GB in 1Q26. PKE grew GB by over 30% yoy in 1Q26, with peak DAU hitting an all-timehigh at 90m.Newlylaunched RocoKingdom:World has sustained over13m average DAUin PC and mobile in its first month. Revenue grew by 13%