Tencent: Why the sell-off looks like an overreaction

• Tencent’s sell-off was triggered by partial iOS data that overstated seasonal weakness and excluded most domestic users and the international games business.

• Domestic game gross receipts still grew at a teens percentage rate (10-19%) year-on-year, while deferred revenue recognition and resilient evergreen titles support the near-term gaming outlook.

• Marketing Services revenue rose 20% year-on-year as AI-driven recommendation upgrades and AIM+ improved advertising efficiency and monetisation.

• WorkBuddy recorded more than 20 million monthly visits, with CodeBuddy and WorkBuddy together recording retention rates of over 60% among active users and over 80% among paying users.

• Based on our updated earnings model, we set a target price of SGD 12 (SDR) / HKD 701 (underlying share), implying approximately 48.6% potential upside by the end of 2028.

On 22 July, Tencent fell by as much as 7.1%, dragging the Hang Seng Tech Index down by 3–3.5% and pulling peer NetEase 5–6% lower. That was a significant market reaction, and it deserves a proper explanation.

The trigger was data from third-party provider Sensor Tower showing that Tencent’s domestic iOS game gross receipts fell 19% quarter-on-quarter in 2Q26—the weakest reading in roughly nine quarters. This appears alarming on the surface, but the bearish interpretation weakens on three fronts.

Seasonality, not deterioration

This pattern is typical of China’s domestic gaming market, with other leading Chinese game companies showing a similar seasonal profile. Tencent’s domestic game revenue rose 18.8% quarter-on-quarter in 1Q26, supported by Chinese New Year top-ups. We saw the same pattern last year: revenue rose 29.2% in 1Q25 before declining 5.8% in 2Q25. A strong first quarter followed by a softer second quarter is normal rather than a warning sign.

Chart 1: Tencent's domestic game revenue exhibits seasonal patterns.

The data are also incomplete. Sensor Tower covers only iOS, which accounts for around one-third of Tencent’s domestic gaming base. Android users, who make up most of the remaining base, are not included in the dataset. International games, which contribute roughly one-third of total game revenue, are also excluded. Although this segment faces a high comparison base from 2025, growth is expected to normalise to the high-single-digit to low-teens range, with less pronounced seasonality, providing a buffer in 2Q26.

Deferred revenue recognition provides an additional cushion. On the 1Q26 earnings call, management said that domestic game gross receipts grew at a teens percentage rate (10-19%) year-on-year, even though reported revenue increased by only 6%. The difference reflected the later timing of Chinese New Year, which shifted some revenue recognition into subsequent quarters. This should provide support to reported revenue in 2Q26.

The titles are still performing

Tencent’s evergreen franchises support this view. Honor of Kings achieved a lifetime high in quarterly gross receipts. Peacekeeper Elite’s peak daily active users reached a lifetime high of 90 million, while gross receipts increased by more than 30% year-on-year. Delta Force also recorded lifetime highs in both users and gross receipts.

This strength was independently supported by QuestMobile data, which showed that Delta Force’s monthly active user base nearly doubled year-on-year to almost 70 million, making it the largest app in its category. Honor of Kings also had the highest core-user penetration of any game tracked by QuestMobile.

New titles are adding to this momentum rather than detracting from it. Roco Kingdom: World sustained more than 13 million average daily active users during its first month and ranked among China’s top 10 mobile games by gross receipts.

The takeaway is that a seasonal swing in one data channel should not be interpreted as a broader trend. The sell-off was a reaction to a partial and seasonally distorted signal rather than a change in the underlying business.

AI monetisation has two faces: Efficiency gains and product traction

Tencent’s shares underperformed for much of the first half of the year, falling by as much as 24% as of 31 July 2026, compared with a 15% decline in the Hang Seng Tech Index over the same period. Much of this gap reflected the perception that Tencent was falling behind in AI, particularly relative to peers with standalone AI revenue disclosures. This perception persisted even as Tencent’s core gaming and advertising businesses remained healthy.

We have previously argued that Tencent’s AI monetisation is initially appearing as efficiency gains within its existing businesses, with faster advertising growth providing the clearest evidence. That argument remains valid, but there is now a second and more direct proof point.

The established case: Advertising

In 1Q26, Marketing Services revenue grew 20% year-on-year, accelerating from 17% in 4Q25 and expanding at more than twice the company’s overall revenue growth rate of 9%. Tencent attributed this performance partly to AI-driven upgrades to its recommendation models, which determine in real time which advertisements to display and how to price them.

Its AIM+ system—Tencent's AI-driven engine for automated ad targeting, creative optimisation, and real-time bid pricing—now handles roughly 30% of advertiser spending, with measurable improvements in advertising pricing and conversion.

The new proof point: WorkBuddy

Tencent is also gaining traction with standalone AI products, most notably WorkBuddy, a desktop AI agent launched on 9 March 2026.

Adoption has increased rapidly. According to the 2Q26 China Office AI Agent Platform Market Insight Report, WorkBuddy recorded more than 20 million monthly visits in June, the highest level in China’s PC-based native AI office-agent market and more than the second- and third-ranked competitors combined.

Reach alone is not the most important metric here. Tencent disclosed that CodeBuddy and WorkBuddy together recorded retention rates of over 60% among active users and over 80% among paying users, though the company did not provide a product-level breakdown or disclose the measurement period or precise definition of retention. Given WorkBuddy's far larger share of the platform's more than 20 million monthly visits, we believe WorkBuddy is the primary driver of this retention signal, though this cannot be independently confirmed, and it remains too early to conclude the product has achieved durable monetisation.

Why has WorkBuddy succeeded so quickly? Tencent’s long history as one of China’s largest internet platforms gives it a deep understanding of user behaviour and workplace pain points, as well as the ability to design products that make everyday tasks noticeably easier.

1.       Low barrier to entry. Unlike tools such as OpenClaw, which require more complex installation, WorkBuddy can be installed with one click. Its app-store-style model allows users to add capabilities as needed, reflecting Tencent’s strength in consumer product design.

2.       Deep ecosystem integration. Tencent Meeting and Tencent Cloud already have broad adoption, allowing WorkBuddy to integrate directly into existing workflows. For example, it can automatically turn a meeting into a formatted document without requiring additional steps from the user.

3.       A growing moat. Combining office, communication, and document-processing tools on a single platform raises switching costs. As more functions are added and the ecosystem expands, WorkBuddy’s early lead could become increasingly difficult for competitors to replicate.

Risks

A slower-than-expected recovery in Chinese consumer spending could weigh on advertising budgets and in-game monetisation, delaying the acceleration in advertising and gaming revenue assumed in this thesis.

If AI monetisation—whether through advertising efficiency gains or standalone products such as WorkBuddy—scales more slowly than expected, elevated AI investment could weigh on margins for longer than the market currently anticipates.

Regulatory risk remains a persistent overhang for China's gaming sector, as a renewed tightening of game approvals, playtime restrictions, or spending limits could disrupt monetisation across Tencent's game portfolio irrespective of underlying demand trends.

Competitive intensity in AI is rising, with domestic peers such as Alibaba and ByteDance and global AI developers investing heavily in agentic and enterprise AI products, and if they close the gap faster than expected, WorkBuddy's early lead and the broader AI re-rating thesis could lose momentum.

The bigger picture

This is not simply about correcting an overreaction to a partial data point. Tencent’s core businesses continue to grow steadily, while AI is performing two roles simultaneously: enhancing its existing businesses and showing early signs of product-market fit in standalone products. These products play directly to Tencent’s strengths as a platform that understands its users and knows how to build products around their needs.

This is why our conviction in Tencent’s AI monetisation is strengthening, supported by WorkBuddy’s adoption and retention rates. We reiterate a BUY rating on Tencent.

Based on our updated earnings model, we set a target price of SGD 12 for the Tencent SDR (SGX: HTCD) and HKD 701 for the underlying share (HKEX: 700), implying approximately 48.6% potential upside by the end of 2028. The SDR allows investors to participate in Tencent's upside with a lower initial investment amount, as each SDR represents one-tenth of the underlying HKEX-listed share.

As Chart 2 shows, Tencent's forward valuation multiple is sitting near the bottom of its historical trading range, well below levels typically associated with its earnings growth profile. Our model has the forward P/E declining from 14.6x in 2025 to 11.4x by 2028E on projected EPS growth (Table 1), suggesting both multiple re-rating and earnings growth stand as potential drivers of upside from current levels.

Chart 2: Tencent’s valuation is at all-time low.

Table 1: Projections for Tencent Holdings
	2025	2026E	2027E	2028E
EPS (CNY)	27.88	30.04	32.60	35.55
EPS Growth	18.59%	7.76%	8.50%	9.07%
PE Ratio	14.59	13.54	12.48	11.44
Upside Potential (Fair PE of 17x)	-	-	-	48.60%
Target Price (SGD)	-	-	-	12
Target Price (HKD)				701
Source: Bloomberg Finance L.P., iFAST Estimates
Data as of 30 July 2026

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.