Tencent plunges 7% as gaming fears, fund rotation hit HK tech

Tencent (0700.HK) tumbled 7% to HK$440.6, its steepest decline in a year, as gaming revenue fears and AI spending costs triggered a sector selloff.

"The selling pressure is likely an overreaction, especially after the stock had posted a solid rebound in recent weeks," analysts at Citi Research wrote, reiterating a Buy rating with a HK$758 target price. The broker attributed the drop to fund rotation into AI hardware, renewed concerns over AI investment weighing on profits, and panic over a year-over-year decline in second-quarter gaming revenue that tracking data may overstate.

The decline came as Chinese mutual funds reduced their Tencent holdings by 18.74 billion yuan (US$2.8 billion) in the second quarter, with the stock dropping out of their top-10 heavy-weight list. Tencent had gained about 10% in the first three weeks of July, accumulating profit-taking pressure. The Hang Seng Tech Index fell 3% to 4,668, while the broader Hang Seng Index slipped 1% to 24,893. NetEase (09999.HK) tumbled 7.4% to HK$193.2, and Kuaishou (01024.HK) fell 5.8%.

The selloff highlights the tension between Tencent's core gaming business — which Citi expects to show 8% year-on-year domestic revenue growth in the second quarter — and its escalating AI investment, with operating expenses climbing 47% in the period. The market now awaits Tencent's semi-annual report to verify the true performance of its gaming segment.

Gaming Revenue Debate Divides Analysts

Market participants disagreed on whether the selloff was justified. Ivan Su, Asia Director at Morningstar Investment Management, said he did not believe any fundamental factors were driving the decline, calling Tencent's gaming business "healthy with solid growth." BNP Paribas' sales team told clients that gaming stocks were heavily sold on rumors of declining Tencent mobile revenue.

Citi forecast Tencent's domestic gaming revenue to rise 8% year-on-year and fall 3.9% quarter-on-quarter in the second quarter, arguing that previously deferred revenue and strong personal computer game performance would make reported revenue more resilient than market expectations.

AI Investment Costs Weigh on Profit Outlook

Beyond short-term gaming revenue fluctuations, the market harbors doubts about the impact of Tencent's continued heavy investment in artificial intelligence. Li Zeming, Chief Investment Officer at Blue Water Capital, said AI-related spending is not expected to affect current-period profits but will gradually be reflected in medium-to-long-term performance through depreciation.

Guosen Securities lowered its earnings forecast for Tencent, projecting adjusted net profit of 268.5 billion yuan for 2026, compared with 259.63 billion yuan for 2025. Orient Securities took a more optimistic stance, forecasting second-quarter revenue of 204.6 billion yuan, up 11% year-on-year, with adjusted net profit of 68.9 billion yuan, up 9%.

Steven Leung, Executive Director at UOB Kay Hian, said the potential revenue dip may have served as an excuse for profit-taking following Tencent's recent rally. Leonid Mironov, Portfolio Manager at Gavekal Capital, said the sell-off could also be based on fund flow factors, noting the absence of national team support for Hong Kong stocks.

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