Tencent (0700.HK): 3Q26 preview: AI strategy comes into focus; the payoff takes longer

Tencent's AI strategy now follows a clear sequence, in our view. It builds a competitive in-house model on a fast release cadence. It earns returns first from enterprise productivity tools and cloud. It scales agents inside Weixin only when quality and cost allow at the scale of a national app. We think this sequence plays to Tencent's strengths, but it front-loads costs. Ahead of the 3Q26 results, we lower our 2026E and 2027E non-IFRS EPS by 2% and 10%, mainly on higher AI depreciation and related costs. We maintain Overweight with a lower PT of HK$625 (prior HK$690). We would own Tencent for a high-quality core franchise that can carry its AI build, at a low valuation, with Weixin agent potential upside beyond our forecasts. We expect 3Q26 to show the cost of this strategy before its revenue: we forecast revenue growth of about 7% and a slight YoY decline in adjusted operating profit, with advertising still growing in the high teens. Our PT is based on 20x 2027E non-IFRS EPS. Downsid