Key investment points

Development history: “industrial practical” core strategy, equal emphasis on big model+application. The company began deploying AI in 2012, and each division has built an AI team, which is oriented towards application implementation in vertical fields. In 2018, the direction of AI strategy development was clarified, and the development progress of the “mixed element” large model was first disclosed to the public in 2022. In March 2023, it was proposed at the annual performance briefing that “AI technology can be expected to become one of the important growth multipliers for enterprises in the medium to long term”. In September 2023, the general big language model, the mixed element big model, was officially unveiled and opened to the public through Tencent Cloud. In May 2024, the one-stop AI smart device creation and distribution platform “Tencent Element” and the smart assistant app “Tencent Yuanbao” based on the mixed-element large model were launched. Guided by application implementation and industrial practicality, the company has increased investment in basic models and formed a layout of large model+tools+applications.

Product layout: Accepts diverse application ecosystems, expecting growth multiplier effects. The company's AI layout covers both B+C, of which the C side includes: 1) existing applications connected to AI functions, 2) AI native applications; B-side connected to production scenarios using a large model+cloud service+PaaS model.

Model side: According to SuperClue's “Chinese Big Model Benchmark Assessment August 2024 Report”, in the evaluation of 11 competency items, Tencent mixed elements ranked first in the country in terms of 8 core tasks.

Application side - Existing applications/scenarios: 1) According to Tencent's official account, as of 2024/11, nearly 700 businesses and scenarios within Tencent have been integrated into the mixed-element model, and the AI functions of some applications have begun to be commercialized. 2) Advertising: The advertising marketing 3.0 system will be upgraded in 2024. AI knows more about advertising, business, and audiences. At the same time, the one-stop AI advertising creative platform “Myosi” will be launched to optimize the advertising process, and commercialization potential is expected to be gradually unleashed.

3) Gaming: Focus on decision-making AI and generative AI, covering the entire life cycle of game development, distribution, and operation, and look forward to the implementation of innovative AI gameplay.

Application side - native AI: 1) Tencent Yuanbao: Launched in May 2024, providing functions such as AI search, AI long text reading, AI writing, and creative avatars. It was upgraded to 2.0 in November 2024 to link with ecosystem products such as Tencent Documents. 2) ima.copilot: Differentiated AI intelligent workbench, links the company's ecological products, and provides AI search, AI knowledge base, and AI note taking functions. 3) Tencent Components: AI Agent platform that supports global distribution to improve the efficiency and practicality of AI agent implementation. 4) AI tools: covering text, music, images, video, etc.

Profit prediction and investment rating: We believe that one of the major advantages of Tencent AI is that it has a rich application ecosystem. On the one hand, it provides the company's AI products with an efficient traffic entry point to reach users, and on the other hand, it enhances the utility of the company's AI products and accelerates the implementation and commercialization of AI products. We expect the company's adjusted net profit for 2024-2026 to be 217.4/240.6/265.3 billion yuan, corresponding to 2024-2026 PE (non-IFRS) of 17/15/14 times, maintaining a “buy” rating.

Risk warning: AI progress falls short of expectations, industry competition increases risks, macroeconomic recovery falls short of expectations, and risks of tightening industry regulations.