Key Takeaways:
Tencent reported Q2 revenue of RMB 204.8 billion, up 11 percent year-on-year, as AI infrastructure spending pushed operating capital expenditure to RMB 51.8 billion, nearly triple the prior-year level.
"We are making substantial investments in AI computing power and have already observed significant upside potential in returns," President Martin Lau said on the earnings call. "For certain computing power orders placed previously, if sold now, the selling price could be more than 30 percent higher than the procurement price from a few months ago."
Non-IFRS operating profit rose 9 percent to RMB 75.6 billion, while excluding new AI products it grew 19 percent to RMB 86.1 billion. Marketing services revenue climbed 22 percent to RMB 44 billion, driven by higher ad impressions on WeChat Video Accounts, where total viewing time grew over 20 percent. Free cash flow turned negative at RMB 13.8 billion, though excluding AI-related prepayments it stood at RMB 37.6 billion. Net cash fell to RMB 58.2 billion from RMB 146.9 billion at the end of March.
The spending push funds Hunyuan 4, a larger-parameter model expected later this year, and WorkBuddy, which ranked first among China's AI productivity services by monthly interaction volume. Chief Strategy Officer James Mitchell said WorkBuddy's paying-user gross margin is already comparable to Tencent Cloud's overall gross margin. Shares of Tencent (00700.HK) fell 2.4 percent in Hong Kong trading.
Hunyuan 3's production version achieved a sixfold increase in average daily token usage versus the preview version and ranked among the top three models globally on OpenRouter by token consumption. The company said it is training Hunyuan 4 with larger parameters, targeting state-of-the-art capabilities.
On the consumer front, WeChat's AI assistant Xiaowei remains in controlled release, powered by the customized WeLM model. Management said Xiaowei's ongoing inference costs will be lower than prior investments in Yuanbao, which is transitioning toward a token-based commercialization model.
R&D expenses rose 35 percent year-on-year to RMB 27.2 billion, while selling and marketing expenses increased 26 percent to RMB 11.9 billion, partly to promote AI-native products. Domestic games revenue grew 17 percent, led by Delta Force, Valorant PC and Roco Kingdom: World, which ranked first among new games released in China this year.
The AI investment drag on reported operating profit narrowed the gap between headline and ex-AI growth, but management framed the spending as a lump-sum infrastructure bet with downside protection. "If we were to directly adjust the business model to leasing computing power, we would not only avoid losses but also generate profits," Lau said. Investors will watch for Hunyuan 4's release later this year and the phased rollout of Xiaowei as the next milestones for Tencent's AI monetization story.
This article is for informational purposes only and does not constitute investment advice.
