Tencent: Ecosystem Summit Reinforces Network Effect and Long-Term Opportunities; Shares Attractive

We left Tencent’s 00700 Digital Ecosystem Summit with greater confidence in our above-consensus forecasts and positive thesis on the internet giant. Through showcasing the latest cloud offerings, the two-day event accomplished three goals: 1) reinforcing the network effect underpinning our wide-moat rating through crossing the 400-million-user milestone for Tencent Meeting; 2) alleviating concerns about Tencent’s ability to capture opportunities in artificial intelligence, or AI; and 3) shedding light on the monetization potential of its array of enterprise solutions. While the event doesn’t move our HKD 704 (USD 90) fair value estimate, it reinforces our view that Tencent is one of the most attractively priced names in our internet coverage. The company remains undervalued, trading at a significant discount of 55% to our fair value estimate.

Our fair value estimate assumes a consolidated revenue CAGR of 13% for 2022-27, including almost 20% growth for the fintech and business services segment. We anticipate that higher technology spending among corporates, the rising adoption of cloud services, and increased monetization efforts by Tencent will all contribute to business services segment revenue growth.

While the debut of Tencent’s first AI model, Hunyuan, has made all the headlines, we believe the more important focus is integrating this technology into Tencent’s product portfolio and delivering improved user experience and engagement. Management provided multiple use cases for Hunyuan, including integration with Tencent Meeting, Tencent Doc, and ad content creation. We’re particularly constructive about the new AI-enabled tools inside Tencent Meeting. Some of these early tools include translation, captioning, meeting summary, and an in-meeting assistant—allowing participants to ask the AI chatbot questions based on the meeting transcript—all of which should accelerate the adoption of Tencent Meeting and drive free-to-paid upgrades.