Tencent capex jumps 176% as AI spending hits free cash flow

Tencent Holdings (0700.HK) reported Q2 revenue of RMB 204.8 billion, up 11 percent, while capex surged 176 percent to RMB 52.8 billion on AI infrastructure.

"We are building a new, AI-empowered Tencent across three layers — intelligence, applications, and infrastructure," Chairman Pony Ma said, noting that the substantial increase in compute procurement will help convert application and model usage into revenue.

Revenue slightly exceeded the Bloomberg consensus of RMB 202.8 billion. Net profit attributable to shareholders was RMB 56 billion, up 0.7 percent year-over-year, missing the RMB 61.8 billion analysts expected. NON-IFRS net profit rose 9 percent to RMB 68.4 billion. Domestic games revenue climbed 17 percent to RMB 47.3 billion, while marketing services grew 22 percent to RMB 43.6 billion. FinTech and business services revenue rose 9 percent to RMB 60.3 billion.

The capex surge pushed free cash flow to negative RMB 13.8 billion, and Tencent's ADR fell 5.34 percent to $56.33. Nomura maintained a Buy rating but trimmed its target price from HKD727 to HKD695, estimating total AI-related investments exceeded RMB 100 billion, including RMB 51 billion in prepayments to secure computing power resources.

Capital expenditure represented approximately 26 percent of revenue, far exceeding market expectations of RMB 32.1 billion. Excluding prepayments for compute procurement, free cash flow stood at RMB 37.6 billion. Losses from new AI products including Hy, Yuanbao, CodeBuddy, WorkBuddy, and Xiaowei widened to RMB 10.5 billion in the quarter, up from RMB 8.8 billion in Q1.

Tencent released the official version of its Hy3 large language model in July, which has ranked among the top three globally by token consumption on OpenRouter since launch. Hy4 is planned for near-term release. WorkBuddy ranks first in monthly visits among desktop-native AI office agents in China, while WeChat's AI agent "Xiaowei" has commenced small-scale grayscale testing. WeChat and Weixin combined monthly active accounts reached 1.439 billion, up 2 percent year-over-year.

The company's net cash position dropped from RMB 146.9 billion at the end of March to RMB 58.2 billion, affected by capital expenditure and RMB 41.6 billion in 2025 annual dividends. In June, Tencent issued $24.5 billion and RMB 15 billion in senior notes with maturities from 10 to 30 years.

Citi, Jefferies, Goldman Sachs, and Morgan Stanley all maintained positive ratings with target prices ranging from HKD650 to HKD758, viewing the heavy investment as necessary to secure a long-term position in AI infrastructure competition. President Martin Lau said the company has already seen clear upside potential for returns on computing power investments.

The capex surge shows management's conviction that AI infrastructure spending will yield returns, with the company competing against ByteDance and Alibaba in China's AI buildout. Investors will watch the Hy4 launch and AI product commercialization results in the coming quarters to assess whether the investment cycle delivers.

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