The company's recent situation

On September 5, the 2024 Tencent Global Digital Ecosystem Conference was held in Shenzhen. With the theme of “Smart Start, Cloud Driven Growth”, the conference focused on new industrial growth under digitalization and explored the road map for enterprise innovation and development.

reviews

Tencent Cloud's three growth engines (product systems): intelligence, integrated innovation, and internationalization. 1) In terms of intelligence, Tencent Cloud actively iterates on AI models and infrastructure (such as mixed-element models, the latest AI infra, RAG solutions, etc.) through AI technology to continuously help enterprises integrate AI to improve business efficiency and business process transformation. 2) In terms of integration and innovation, Tencent Cloud is compatible with mainstream domestic chip manufacturers through basic software (core products such as database TDSQL, operating system TencentOS, proprietary cloud TCE, big data TBDS, artificial intelligence development platform TI (“5T”)) and self-developed product systems (Tencent Conference, Enterprise WeChat, Tencent Documents, Tencent Enjoy, etc.) to promote the digital upgrading of traditional industries, such as providing customized solutions in the fields of finance, medical care, transportation, etc. 3) In terms of internationalization, Tencent Cloud focuses on the global market. Through technical capabilities such as cloud native, audio and video, edge acceleration, databases, security and compliance, Tencent Cloud has now served over 10,000 overseas customers, covering 80+ countries and regions.

Hybrid Turbo was released, and the field of AI infrastructure was upgraded. According to the Tencent Cloud conference, the next-generation large-scale model “Hybrid Turbo” upgrade was launched. Compared with the previous generation, Turbo increased training efficiency by 108%, increased inference efficiency by 100%, reduced inference costs by 50%, and increased decoding speed by 20%. The results were compared to GPT-4o on multiple benchmarks. In addition, Tencent also released the AI infrastructure brand “Tencent Cloud Intelligent Computing”. It integrates Tencent Cloud products such as Tencent Cloud's high-performance computing HCC, high-performance network IHN, high-performance cloud storage, acceleration frameworks, containers, vector databases, and intelligent computing kits, and is leading the industry in terms of stability and performance, data reading and writing efficiency, and communication time. We believe that Tencent's current infrastructure upgrade takes full account of business practicality and is expected to play a faster role within the business line.

Build AI that is closest to the industry. The Tencent Cloud conference mentioned that the current focus of the industry's focus on AI models is shifting from model technology itself to the implementation of intelligent applications — currently the mixed model has been implemented in more than 700 business scenarios within Tencent, and applications such as Tencent Conference, Tencent Documents, Tencent Enjoy, and AI Code Assistant are also gradually incorporating AI capabilities. We believe that compared to major overseas Internet companies that are investing large amounts of capital “regardless of cost” and “worrying about being left behind,” Tencent is clearly using manageable capital expenditure and more efficient investment methods to focus on actual application scenarios to build AI that is closest to the industry. Tang Daosheng, CEO of Tencent Cloud, said that the gross profit of Tencent Cloud's business has continued to improve this year and is gradually getting closer to the profit target.

Profit forecasting and valuation

We maintain our 2024/2025 revenue and profit forecasts unchanged. Maintaining an outperforming industry rating and target price of HK$468, corresponding to 17.7x/14.5x 2024e/2025e non-IFRS P/E, with 25% upside compared to the current stock price. The current share price is trading at 14.1x/11.6x 2024e/2025e Non-IFRS P/E.

risks

Regulatory risks; new game launches fall short of expectations; higher costs or fee rates than anticipated.