As the leading Internet brother in China,$TENCENT (00700.HK)$It has always been a “guiding principle” in Hong Kong stocks, with a market capitalization of over 7 trillion Hong Kong dollars at its peak. However, in the past three years, this former “stock tycoon” has been overshadowed by the capital market, falling by nearly 70% at most.

Everything seemed to have suddenly changed. Since the end of April, Tencent's performance in Hong Kong stocks has been impressive, breaking through several pressure points in one fell swoop. In particular, after the release of its quarterly report on May 15, Tencent jumped high. At one point, it rose to a market capitalization of HK$401 per share, which is only a step away from returning to $4 trillion. Since this year, Tencent's cumulative increase has exceeded 31%.

The “stock king” was able to perform an elephant dance, which meant that investors' attitude towards Tencent had clearly changed. Driven by factors such as performance, 100 billion repurchase plans, and a sharp rise in the Hong Kong stock market, Tencent is “the return of the king” to launch a charge with Hong Kong stocks that have been suppressed for a long time.

Of course, Tencent has gone through a period of rapid revenue growth. If it wants to return to its peak and even surpass HK$7 trillion, this is not an easy task. Perhaps only AI, which has unlimited potential, can do it.

Ma Huateng also hopes to seize the AI wave and hope it can become a multiplier for Tencent's business development. Although Tencent's exploration of AI models is still in its infancy, Tencent has already taken the lead in tasting the sweetness, and its “budding” business has been growing at an accelerated pace under the aegis of AI.

Today, tech giants from around the world, including Microsoft, Google, Byte, and Baidu, are competing fiercely on the AI circuit. Tencent's business, including games, can no longer “lie on the credit book”; it needs to speed up and forge a new world for itself.

kinetic energy

Tencent hasn't experienced such drastic stock price fluctuations in a long time. In less than half a year, Tencent's stock price rose by over HK$900 billion.

Over the past two years, Tencent's stock price has basically hovered around HK$3 trillion. Each time, there has been a wave of sharp increases, but it has also quickly fallen, leaving many investors feeling sad.

This rise has made many investors feel “energized.” Some institutional investors analyzed from Wall Street News. On the one hand, Tencent's rise is related to fund managers' position adjustments in emerging markets and optimistic about China's economic recovery; on the other hand, there are also some good signs of improvement in Tencent's fundamentals.

Since the second half of 2022, Tencent has achieved a new growth trend where profit growth is greater than revenue growth for 6 consecutive quarters.

On the evening of May 14, Tencent released its financial report for the first quarter of 2024. Revenue for the single quarter increased 6% year on year to 159.5 billion yuan, and net profit from non-IFRS increased 54% year on year to 50.265 billion yuan, far exceeding market expectations of 43 billion yuan while also reaching a record high of the past ten years.

As an important indicator for measuring sustainability, Tencent's gross profit growth rate remained above 20% for 4 consecutive quarters. Data shows that in the first quarter of this year, Tencent's gross profit increased 23% year over year to 83.87 billion yuan, and gross margin increased from 45% in the same period last year to 53%, reaching a record high in 18 years.

Behind the rise in gross profit levels is the continuous optimization of Tencent's revenue structure. Simply put, it means abandoning ineffective revenue growth and focusing on high-margin business growth.

The increase in gross profit is mainly a rapid increase in high-margin revenue sources, including WeChat video accounts and search advertising revenue, mini game platform service fees, financial services revenue, and technical service fees for video account merchants.

Tencent management pointed out that the company has identified low-quality products and services in the business, so it can focus on its core business while making growth drivers more obvious and clear.

Advertising, fintech, and corporate services are the main drivers of Tencent's current revenue growth. In the first quarter of this year, when revenue from value-added services such as games declined slightly year on year, Tencent's revenue from online advertising increased 26% year over year to 26.5 billion yuan, and revenue from fintech and corporate services increased 7% year over year to 52.3 billion yuan.

Tencent's advertising revenue has maintained growth of more than 20% for four consecutive quarters. There are two important reasons for this: one is the increase in advertising revenue driven by video accounts, applets, search, etc., and the other is the increase in advertising efficiency driven by AI. The former is a sprout of WeChat's “old tree,” while the latter is where AI is beginning to empower Tencent's business.

In the first quarter, Tencent upgraded its advertising technology platform, which not only provided all advertisers with a one-stop artificial intelligence advertising creative platform based on Tencent's hybrid model, but also significantly improved the recommendation accuracy and delivery efficiency of Tencent's advertising business, providing advertisers with satisfactory ROI (advertising return).

Tencent pointed out that due to the increase in video views and click-through rates, advertising revenue from video accounts regarded as “the company's hope” increased by more than 100% year-on-year.

Obviously, AI has become a catalyst for Tencent's “sprout” business to achieve high-quality growth.

The upheaval

In the mobile internet era, Tencent is an absolute winner. With its two major moat businesses, social networking and gaming, it has firmly taken the position of “king of technology stocks” in China; now, big models are driving the advent of the AI era at an accelerated pace, and Tencent also has a sense of crisis.

As Tencent CEO Ma Huateng said, the AI big model is an opportunity not seen in hundreds of years, similar to the industrial revolution of inventing electricity.

Facing such a big opportunity, whether it's the big internet players such as Tencent, Ali, Baidu, and 360, or up-and-comers that have risen in recent years, such as ByteDance, etc., have joined this new battleground of fierce competition.

Since last year, the amount of “AI” has become an important indicator for the capital market to evaluate a technology company. This is not only about whether it can use AI to reshape its business, but also affects its future market prospects.

Compared to other tech giants racing on the AI big model circuit, Tencent appears to be relatively cautious. Not only was it the last player in BAT to put its own big model on the table, but it is also a major internet manufacturer that has yet to officially launch an independent big model app.

In a context where the underlying technology of the AI model is still being iterated, and the C-side commercialization path is still unclear, Tencent chose a path that focuses more on practicality, first serving Tencent's own business, then opening up big model capabilities to the industry through Tencent Cloud, while the C-side has slowed down.

A brokerage analyst told Wall Street News that AI essentially reduces costs and increases efficiency, so first applying big model capabilities to one's own business scenarios is an AI commercialization path with relatively low risk and easy to see results.

The drive for advertising revenue is only the first obvious economic benefit that AI technology has empowered Tencent, and there will be more room for imagination in the future.

Analysts at GF Securities pointed out that in the past, Tencent's investments in three fields, namely short videos, overseas games, and SaaS, have begun to see initial results. “Sprouts” are growing vigorously, contributing high-quality profits and sources. In the future, we will continue to invest in AI technology to consolidate long-term competitive barriers.

According to Tencent's latest disclosure, at present, the mixed-yuan model has been tested in more than 600 Tencent's internal businesses and scenarios, and continues to iterate in Tencent's rich ecosystem.

Regarding Tencent's pillar business, games, which the outside world is most concerned about, Tencent management revealed that the mixed-yuan model will assist the game business in many ways, but currently the biggest contribution is customer service. In the future, as mixed elements are upgraded to multi-modal capabilities, it can be used to produce high-quality videos, which will be very helpful in game content creation, etc.

Of course, the entire industry has higher expectations for killer apps. After all, this can bring a real second growth curve to a company, and perhaps seize new huge traffic entrances. For Tencent, this is also an opportunity for it to return to a high growth trajectory in the future.

Tencent hasn't let itself be absent from independent C-side apps for too long. On May 17, Tencent announced that Tencent Yuanbao, a C-side assistant app based on the mixed-yuan model, will be released on May 30.

Obviously, Tencent believes that its general model has sufficient capabilities and can begin to expand outward after thorough internal testing. It's only a matter of time before it opens to the C side.

Although many AI apps now compete on the same stage, it's not easy to get out, but Tencent, which has a large number of users, seems to have a greater advantage. Of course, this also restrains Tencent, making it very cautious on the path of being a big model. Tencent will also often “test the waters” mentality for C-end products before presenting products that surprise users enough.

The opportunities of AI have attracted global tech giants to rush forward. National-level apps such as WeChat and Douyin may also be disrupted by new AI applications. In the face of this “fourth industrial revolution,” no one wants to be left behind. Tech giants also don't want to be the one that they will be eliminated when the “iPhone moment” comes.

This is bound to be a momentous moment in history. Tencent also hopes to use this to innovate itself and create myths again in the AI era.

Editor/Jeffrey