Author | Huang Yu

Edited | Zhou Zhiyu

In the wave of large model applications, Tencent has ushered in an opportunity to reach new peaks in the AI era.

Based on Tencent's "Blitzkrieg" approach to AI applications over the past month, capital markets expect Tencent to declare its determination to fully embrace the AI era, and the release of the latest earnings reports is undoubtedly an important observation window.

On March 19, Tencent reported its performance for the fourth quarter and the whole year of 2024, indicating that due to the AI global strategy entering a phase of heavy investment, its capital expenditure for the entire year last year exceeded 76.7 billion yuan, an increase of 221% year-on-year, setting a historical high and accounting for about 12% of the annual revenue of 660.3 billion yuan.

During the performance release conference call on the same day, the AI global strategy undoubtedly became the focus.

Tencent President Liu Chiping revealed that Tencent's capital expenditures increased significantly in the fourth quarter of last year, as Tencent purchased more GPUs in this quarter to meet inference demands. "We plan to further increase capital expenditures in 2025 and expect capital expenditures to account for a low double-digit percentage of revenue."

In other words, Tencent's capital expenditures this year are likely to reach hundreds of billions.

For Tencent, focusing on AI can not only help seize the next super traffic entrance but also become an accelerator for Tencent's business development. According to Goldman Sachs, in the Chinese AI industry, "AI infrastructure looks at Alibaba, AI applications look at Tencent," but evidently, these two major Chinese Internet giants have now both released the momentum they desire.

However, to take the lead in this global AI arms race, "financial capability" is very important. After the previous two years of transformation focusing on "cost reduction, efficiency enhancement, and concentrated efforts," Tencent's performance last year has already rebounded, with total revenue in the fourth quarter regaining double-digit growth, which is the confidence behind Tencent's strong investment in AI.

Standing at the critical juncture of AI application explosion and the reassessment of Chinese assets, Tencent, with its vast user base and rich AI application scenarios, is expected to deepen the moat of traditional businesses while seizing new opportunities brought by AI, leading its Market Cap back to 7 trillion or even higher.

Reshaping AI Strategy

From cautious implementation last year to a full-scale offensive now, Tencent is reshaping its AI strategy.

Tencent's Chairman and CEO Ma Huateng stated: "Months ago, we reorganized the AI team to focus on rapid product innovation and deep model development, increased AI-related capital expenditures, and intensified our R&D and marketing efforts for native AI products."

Tencent believes that these increased investments will bring sustainable returns by enhancing the efficiency of its advertising business and the lifecycle of games, and will create longer-term value as its personal AI applications accelerate in popularity and more companies adopt Tencent's AI services.

On the same day as the release of the Earnings Reports, at the 2025 Tencent Global Digital Ecology Conference in Shanghai, Tencent's system elaborated on its AI strategy considerations.

It is reported that Tencent will adopt a multi-model strategy of 'firmly investing in self-researched models + openly embracing advanced open-source models' to comprehensively layout in the foundational capability layer, model layer, and application layer, providing users with a rich array of AI application products to support industrial innovation and growth.

This means that while actively integrating the DeepSeek large model, Tencent will continue to increase its R&D investment in its self-researched large model technology.

Tencent's self-researched mixed Yuan large model is the first in the industry to adopt the MoE architecture, with flagship model parameters reaching trillions, and it has already been integrated into over 700 products and business scenarios at Tencent.

Integrating the DeepSeek large model has also, to some extent, compelled the mixed Yuan large model to upgrade more quickly. Recently, Tencent's self-researched reasoning model Thinker (T1), which excels at complex tasks and deep reasoning, has been launched on Tencent Yuebao, and Tencent has also released a new generation fast-thinking model mixed Yuan Turbo S, which emphasizes faster task processing capabilities, and has launched and open-sourced several models such as 'Image to Video Model' and '3D Generation Model'.

Additionally, to further enhance organizational collaboration efficiency, Tencent has adjusted more AI products and applications such as Tencent Yuebao, QQ Browser, Sogou Input Method, and ima to CSIG (Cloud and Smart Industry Group).

This move undoubtedly allows the AI product matrix, such as Yuebao, to focus more on commercialization while TEG (Technical Engineering Group), responsible for the development tasks of Tencent's mixed Yuan large model, focuses on improving model performance.

Tencent Group Senior Executive Vice President and CEO of the Cloud and Smart Industry Group, Tang Daosheng, stated that with the open source of Deepseek and breakthroughs in deep thinking, the AI large model is crossing the threshold of industrial landing and standing at a new node of widespread application. The industry has evolved from being dominated by model training to more application and Agent-driven developments today.

Turn defense into offense.

In this wave of AI surge sparked by ChatGPT, Tencent has made efforts in the past two years but failed to turn the tide with any products. After the explosive popularity of DeepSeek during this year's Spring Festival, AI applications have reached a critical turning point, while the AI model equality brought by DeepSeek has directly reshuffled the entire AI industry, making competition in AIGC products seem to return to the same starting line.

Tencent has keenly captured this point and has actively shifted from defense to offense in its AI Global Strategy.

In February, Tencent fully launched the 'Lightning War' plan, becoming one of the most proactive companies among large enterprises to embrace DeepSeek. Not only did they integrate the DeepSeek model into several of their products, but they also became the first leading vendor to introduce DeepSeek into their main consumer-end products.

As of now, products such as WeChat, Yuanbao, QQ Browser, QQ Music, ima (Tencent Smart Workbench), Tencent Docs, and Tencent Maps have all integrated DeepSeek, while also supporting their self-developed Mixed Yuan large model.

In this opening battle of AI applications, Tencent has two noteworthy tactics that have drawn industry attention. One is the integration of the WeChat search with the DeepSeek large model; the other is concentrating resources to enhance Yuanbao. Tencent disclosed that 30 versions have been updated in 35 days, demonstrating a strong commitment.

Since the release and open source of the DeepSeek-R1 model nearly two months ago, many Internet products have connected to it, all aiming to capture market share by leveraging this recognized model. However, none of these products can compare to WeChat, which boasts a super traffic pool with over 1.3 billion monthly active users, drawing significant attention.

On February 15, Wall Street News confirmed from Tencent that WeChat Search officially began grey testing with the integration of DeepSeek-R1. The enthusiasm of users for the DeepSeek model far exceeded the WeChat team's expectations, resulting in a huge consumption of computing power.

Due to the inability to meet all users' demands for AI search in the short term, three days later, WeChat had no choice but to redirect significant traffic to the "brother APP" Yuanbao. Users who have not yet been grey tested for AI search will see the option to "Download Yuanbao (Experience DeepSeek-R1)" when they click on the search bar at the top of the WeChat dialogue.

As the core entry point of Tencent's ecosystem, WeChat's traffic distribution strategy has always been cautious, focusing more on optimizing its own features rather than actively redirecting traffic to other applications. The action of redirecting downloads of Yuanbao through the WeChat search entry reflects Tencent's significant shift in its AI strategy, indicating that Yuanbao will take a more proactive approach to traffic generation, and showcasing Tencent's ambition in the C-end AI scenario.

Yuanbao Vanguard

Tencent's choice of the "Mixing Yuan + DeepSeek" dual-engine strategy has emerged, and among the matrix of AI products it has created, Yuanbao has already stood at the core of Tencent's AI strategy, becoming a pioneer in the competition for the next generation of super traffic entry.

Tencent hopes Yubao can become an "all-purpose AI assistant" in everyone's pocket. Moreover, from the perspective of AI search capabilities, Yubao also acts as a connector that links all internal ecosystems of Tencent, including WeChat Public Accounts and WeChat Work.

Shifting from last year's low-profile approach, on the one hand, it works late into the night to iterate Yuanbao, while also intensively boosting traffic assistance. After integrating DeepSeek, Yuanbao's advertisements quickly spread across all platforms including Tencent's apps, and external channels like Bilibili, Zhihu, and Xiaohongshu also became important battlegrounds.

According to DataEye data, starting from February 18, the ad placement volume of Tencent's Yuanbao surged, increasing from about 2,000 sets of daily materials to over 0.017 million sets by the end of the month, rising from the bottom position among Doubao, Kimi, and others to the top. In contrast, Kimi's placement力度大幅下滑, dropping from around 0.02 million sets of daily materials to nearly stagnation.

It is not hard to see that Yuanbao hopes to leverage the popularity of DeepSeek to launch a blitzkrieg, in addition to a large amount of advertising investment, it is also rapidly iterating its product features to seize the market, including launching the deep thinking model "Hunyuan T1", launching the fast thinking large model Hunyuan Turbo S, launching the desktop version, and supporting the upload and export of Tencent documents, almost updating its capabilities every three days on average.

With such operations, on March 3, the Tencent Yuanbao APP surpassed DeepSeek to rise to first place in the free App download rankings of the Apple App Store in China, while Doubao ranked fourth, noting that on February 13, Yuanbao's position on this list was still outside the top 100.

However, it is worth mentioning that download volumes can only reflect short-term promotional effects, while retention rates and active user numbers can directly reflect the product's long-term value and user acceptance.

Liu Chiping revealed that from February to March, Yuanbao's daily active users (DAU) increased by 20 times, becoming the third-ranked AI-native mobile application in China by DAU.

According to Xsignal, from February 17 to the end of February, Yuanbao's DAU (daily active user number) showed a straight upward trend. On February 17, Yuanbao's DAU was approximately at the million level, about 20 million lower than Doubao; by the 25th, Yuanbao's DAU had already surpassed 10 million.

However, within a month of the DeepSeek R1 release, DeepSeek's DAU has already exceeded 100 million, and has stabilized daily at around 80 million. If in the future Tencent Yuanbao aims to become the number one AI super application, DeepSeek will be a stronger competitor compared to Doubao.

Liu Chiping pointed out that as a startup, Tencent indeed provided substantial investment flow for Yuanbao, and during this process, it has also been closely monitoring retention rates, which are still quite good at this stage.

So we continue with the investment flow, but in the future it will certainly not solely rely on investment flow to acquire users. Many various features will be added to Yuanbao in the future to turn it into a more intelligent AI assistant, and to create an organic linkage between Yuanbao and our existing products.

Reassessing the Future.

Tencent's past investments in AI have already been reflected in the Earnings Reports.

Tencent's Chairman of the Board of Directors and CEO, Ma Huateng, stated that, "Benefiting from the AI-enabled upgrade of the advertising platform, increased user engagement on video accounts, and the growth of evergreen games, we achieved double-digit revenue growth in the fourth quarter of 2024 and continued to improve operational efficiency."

Although DeepSeek has become quite popular, compared to national applications like WeChat, Douyin, and Weibo, which have billions of users, it is still far from being a super app. Now, Tencent is expected to quickly realize value monetization due to its vast user base and rich scenario advantages, which is one of the biggest expectations of the capital markets for Tencent today.

Capital expenditure is the most significant Indicator of Tencent's commitment to AI, and it is also the focus of investors today. Tencent's recent decision to further increase capital expenditures will undoubtedly help boost market confidence.

In comparison, not long ago, Alibaba announced that it would invest more than 380 billion yuan over the next three years to build cloud and AI Hardware infrastructure, a total that exceeds the sum of the past decade.

Tencent's budget for this year is approaching the 100 billion level, and it seems that the intensity of investment will not be weaker than that of Alibaba.

Regarding specific directions for capital expenditures, Liu Chiping revealed that in terms of R&D, investment will continue in self-research models and accelerate AI application development across various business groups. Additionally, Tencent will invest in marketing to improve user awareness and adoption rates of new AI products, such as Yuánbǎo.

We believe these investments will yield good economic returns, but we also have the ability and willingness to continue providing capital returns to Shareholders. We plan to repurchase at least 80 billion Hong Kong dollars of Stocks by 2025.

With solid support in real Gold and Silver, the landscape of Tencent's AI applications is opening up from B-end to C-end, and the AI strategy is expected to become its second growth curve.

However, some investors have pointed out that AI technology can bring intelligent enhancements to Tencent's existing products, especially the enormous commercialization potential within the WeChat ecosystem, but whether new growth can be achieved through AI depends on technological breakthroughs and market applications.

In this global AI arms race, Tencent has clear advantages.

Huaan Securities Analysts pointed out that for Tencent, the deep integration of its products with DeepSeek reflects Tencent's technological integration capability of 'internal and external transformation', by permeating AI capabilities into core scenarios such as social, content, and finance, Tencent is building an intelligent service network that responds to user demands in real time and circulates data value.

"When technological dividends are released exponentially through super entrances such as WeChat, QQ, and Tencent Cloud, the network effects created may form a 'data-scenario-technology' flywheel that is difficult for other enterprises to replicate," said the Huaan Securities Analyst.

Goldman Sachs believes that benefitting from the e-commerce infrastructure for small shops, the mini-program ecosystem, and WeChat payment functions, Tencent is a major beneficiary of AI applications.

Hua Chuang Securities pointed out that they are Bullish on Tencent's top-down push for AI transformation of products in 2025, which will bring innovation in user experience and open up incremental commercialization space, driving valuation increases, giving Tencent a Target Price of 544-604.45 Hong Kong dollars for 2025.

Since the beginning of the year, Hong Kong stocks in the Technology sector have performed remarkably, with Tencent's stock price continuously rising and breaking through the 500 Hong Kong dollar mark, an increase of over 29% year-to-date. As of the market close on March 19, Tencent's stock price was approximately 540 Hong Kong dollars per share, with a total market cap of about 4.96 trillion Hong Kong dollars.

In the era of the Mobile Internet, Tencent is the absolute winner, firmly holding the position of "King of Technology Stocks" in China with its two major moat businesses: social networking and gaming. At the beginning of 2021, its stock price once exceeded 700 Hong Kong dollars per share, and its market cap was over 7 trillion Hong Kong dollars.

Now, as the era of AI arrives, whether Tencent can seize the traffic foundation brought by the Mobile Internet era and occupy the next generation super traffic entrance will be key to whether it can return to its peak in market cap.