Tencent Holdings (700 HK): Facing a temporary shortage of chip supply
Executive Summary
The Chip Supply Challenge
The most surprising takeaway from Tencent's otherwise solid 3Q25 results was management's candid admission during the earnings call that the company is facing supply constraints for AI chips. This issue prompted Tencent to revise down its FY25 capex guidance, reflecting the reality of tight global AI chip supply and the practical difficulties Tencent faces in securing these critical resources.
The chip shortage impacts Tencent's cloud business most significantly, as computing power is one of the most urgently needed services by enterprise customers deploying large language models. As enterprise digital transformation and AI application adoption accelerate, demand for high-performance AI chips in cloud computing services has surged.
However, Tencent also confirmed a positive signal—the company's two most valued AI assets, the Yuanbao AI chatbot and Hunyuan large language model, have not been affected by the supply shortage, ensuring the company's competitiveness in consumer-facing AI applications.
| Company | AI Infrastructure | Chip Strategy |
|---|---|---|
| Tencent | Relatively Behind | Facing Supply Shortage |
| Alibaba | Continuous Large-scale Investment | Proprietary Chips + Partnerships |
| Bytedance | Aggressive Expansion | Locked-in Supply with Designers |
Comparative analysis shows that Tencent's investment in AI infrastructure and large language models may be insufficient relative to Bytedance and Alibaba. These two companies continued investing aggressively long before recent AI breakthroughs, including purchases of advanced chips from overseas suppliers and partnerships with overseas data centers.
"The chip supply shortage appears to be more company-specific than industry-wide."
Core Business Momentum
Despite facing short-term AI chip supply challenges, Tencent's core businesses—online gaming and advertising—continue to maintain strong growth momentum, providing solid cash flow foundation for long-term AI investments.
In 3Q25, Tencent's total revenue reached CNY 192.9bn, up 15% YoY, exceeding market expectations by 2.2%. More impressively, non-IFRS net profit reached CNY 70.6bn, up 18% YoY, beating market expectations by 6.8%, demonstrating the company's excellent profitability and operational efficiency.
Gaming: The Core Growth Engine
Gaming remains Tencent's core growth engine. 3Q25 gaming revenue reached CNY 63.6bn, surging 23% YoY. Domestic gaming revenue of CNY 40.4bn grew 15% YoY, primarily driven by continued strong performance of flagship games like Honor of Kings and Peacekeeper Elite.
More notably, international gaming business showed explosive growth—3Q25 international gaming revenue reached CNY 18.8bn, jumping 43% YoY and 11% QoQ, significantly exceeding Nomura's estimate by 15%. This outstanding performance reflects Tencent's successful global gaming strategy.
| Segment | Revenue (CNY bn) | YoY Growth | % of Total |
|---|---|---|---|
| Online Gaming | 63.6 | +23% | 33% |
| Marketing Services | 36.2 | +21% | 19% |
| FinTech & Business Services | 58.2 | +10% | 30% |
| Other VAS | 32.3 | +8% | 17% |
Advertising Recovery Continues
Marketing Services business also performed strongly, with 3Q25 revenue reaching CNY 36.2bn, up 21% YoY, slightly above market expectations. The robust advertising revenue growth primarily benefits from rapid development of new advertising scenarios like Video Accounts and continued expansion of the WeChat ecosystem.
AI Race: Long-term Prospects
Although Tencent temporarily lags behind major competitors in AI infrastructure investment, the company remains a strong contender in the AI race. Tencent has significantly ramped up efforts in AI this year—not only substantially increasing capex, but also actively recruiting AI talent, including hiring a former OpenAI engineer who now heads Tencent's LLM team.
Tencent has significant potential in AI Agent applications, primarily thanks to its powerful WeChat ecosystem. The Yuanbao AI chatbot is evolving into a super AI agent that will eventually connect WeChat users with numerous third-party service providers already present within WeChat via mini programs.
These service providers are embedded in WeChat through mini programs, covering various life scenarios including e-commerce, transportation, dining, healthcare, and education. Yuanbao, as a unified AI entry point, can understand users' natural language needs and intelligently invoke appropriate services to complete tasks—this seamless user experience creates a moat that other competitors find difficult to replicate.
Key Questions & Analysis
Impact on Daily Life
- Enhanced AI Assistant Services: With continuous optimization of Yuanbao AI chatbot, WeChat users will be able to complete more daily tasks through natural language conversations, significantly improving convenience.
- Upgraded Gaming Entertainment: Strong growth in Tencent's gaming business means more high-quality game releases, particularly introduction of excellent overseas games, providing richer entertainment choices.
- Optimized Personalized Content: Through AI technology applications, content recommendations on platforms like WeChat Video Accounts will become more precise, helping users discover quality content.
- Improved Smart Customer Service: Hunyuan LLM applications in customer service scenarios will enable more timely and accurate responses, allowing users to receive faster solutions.
- More Intelligent Mini Program Ecosystem: With deep integration of AI capabilities in WeChat Mini Programs, various lifestyle services will become more intelligent, providing personalized recommendations.
Investment Strategy
Nomura maintains its Buy rating on Tencent and raises the SOTP-based target price to HKD 775 from HKD 757, primarily based on increased gaming business valuation. The current price of HKD 641 versus target price of HKD 775 implies attractive 20.9% upside.
- Maintain Buy Rating: Strong core business growth and promising long-term AI positioning support active portfolio allocation.
- Focus on Gaming Growth: Gaming business, especially international markets, shows strong momentum. FY26F 18x P/E valuation appears reasonable.
- Capture Rebound Opportunity: AI chip supply issue is a short-term challenge expected to ease within 6-12 months, potentially triggering valuation rerating.
- Long-term WeChat Value: Yuanbao AI Agent has potential to evolve into a super application entry point, creating unique long-term value.
- Staged Position Building: Considering potential short-term uncertainty, recommend staged position building approach to manage volatility.
Key Risk Factors
Prolonged AI Chip Shortage: If global AI chip supply tightness deteriorates further, or Tencent's progress in securing alternative suppliers falls short of expectations, cloud business growth may remain under pressure.
Intensified AI Competition: Competitors like Bytedance and Alibaba continue massive AI investments, potentially capturing greater share in consumer AI applications and enterprise services markets.
Regulatory Policy Changes: Internet industry regulatory environment remains uncertain, particularly regarding potential new requirements in AI applications, data security, and content moderation.
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