We maintain our Outperform recommendation on Tencent post its decent 1Q25 results; topline accelerated, EBITDA margin expanded, free operating cash flow remained robust, and debt metrics remained modest. We expect Tencent’s topline growth to marginally accelerate in FY25, supported by its advertising, domestic/international gaming, fintech and cloud segments; we expect EBITDA margin to marginally improve as its better revenue mix offset the increased R&D spending for AI development; we expect FOCF to expand, and debt metrics to improve from 1Q25. We continue viewing Tencent as a core holding in China and Asia IG credits. We prefer its 2029/2041 notes for spread pick up against Chinese SOEs. We think Tencent is more attractive compared to BIDU/JD and more defensive that BBB China tech.

While Chinese regulators have adopted a more friendly stance towards tech companies, any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past.

Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.

US-China tension may escalate under the new Trump Administration, including additional chip sanctions, which may result in higher volatility. Failing to secure a stable supply of advanced AI chips and/(or) find domestic alternatives could weigh on the long-term AI development of Tencent against international peers.