AI hardware rally lifts ChiNext 1.46% as Tencent capex weighs

ChiNext rose 1.46% and the STAR 50 gained 2% as AI hardware stocks led a broad advance, while Tencent fell more than 2% after its earnings showed record capital expenditure.

"Tencent's solid core fundamentals are offset by AI front-loaded investment, with earnings expected to stay flat through 2027," Morgan Stanley analysts said, cutting the target price more than 15% to HK$550 while maintaining an overweight rating.

The Shanghai Composite added 0.34% and the Shenzhen Component gained 0.93%, with computing power leasing, CPO, semiconductor, and PCB names leading. Optical communication stocks surged, with Zhongji Innolight, Eoptolink, and TFC Optical rising more than 2%. Hong Kong's Hang Seng Index slipped 0.19% while the Hang Seng Tech Index added 0.40%, with Tencent touching a two-week intraday low.

Tencent's Q2 revenue rose 11% to RMB 204.8 billion, but capital expenditure surged 176% to RMB 52.8 billion on AI compute purchases, flipping free cash flow to negative RMB 13.8 billion. The divergence between AI hardware momentum and Tencent's pullback shows market rotation within tech, with investors weighing near-term profit sacrifice against long-term AI positioning.

Tencent's AI Investment Squeezes Cash Flow

Tencent's marketing services revenue jumped 22% to RMB 43.6 billion, powered by AI-driven ad targeting, while domestic gaming rose 17% to RMB 47.3 billion. International gaming slipped 0.8% to RMB 18.6 billion on currency headwinds. Non-IFRS profit grew 9% to RMB 68.4 billion, but IFRS net profit edged up just 0.7% to RMB 56 billion, missing consensus.

The company's net cash position dropped to RMB 58.2 billion from RMB 146.9 billion at the end of March, prompting Tencent to issue $24.5 billion and RMB 15 billion in senior notes across four tranches. WeChat and Weixin combined monthly active users reached 1.439 billion, up 2% year-over-year. Management said excluding AI-related prepayments, free cash flow would have been RMB 37.6 billion, and excluding losses from new AI products, operating profit growth would have been 19%. Tencent repurchased approximately 37.4 million shares for HK$16.9 billion during the quarter, running buybacks in parallel with elevated capex.

Market Breadth and Cross-Asset Signals

Bond futures rallied across the curve, with the 30-year contract up 0.16% and the 10-year up 0.03%. Domestic commodity futures were mostly lower, with glass falling nearly 3% and alumina down more than 1%, while eggs gained 2% and silver rose more than 1%. Real estate, oil and gas, and coal sectors lagged on the A-share board, while pharma names were active with CRO stocks rising.

More than 2,200 stocks advanced across the Shanghai, Shenzhen, and Beijing exchanges. Computing power leasing names extended gains, with Chengdi Xiangjiang hitting a third consecutive limit-up and Qunxing Toys at limit-up. On the HK board, Lenovo, Hua Hong Semiconductor, Zhipu, and SMIC advanced, while JD.com, Li Auto, and Leapmotor led declines alongside Tencent. The AI hardware surge follows TSMC's report of a 45% jump in monthly sales, reflecting sustained global demand for AI infrastructure.

This article is for informational purposes only and does not constitute investment advice.