Tencent’s AI Power Play and Q4 Growth

• Tencent’s revenue rose 11% YoY, with gaming up 23% and advertising up 17%.
  
  
• Net profit surged 85% YoY, but AI investments slashed free cash flow by 87%.
  
  
• Tencent is Naspers' & Prosus' biggest asset, South African investors might want to watch its AI bets closely.

Tencent is one of China’s biggest tech giants, with major interests spanning gaming, cloud, AI, and digital services. It is also the largest holding in both Naspers and Prosus, making it a key company to watch when investing in either. Naspers and Prosus are major holdings in our EasyETFs Balanced Actively Managed ETF, available on the EasyEquities platform.

Tencent Holdings Ltd wrapped up 2024 on a strong note, with double-digit revenue growth and accelerated profit expansion driven by high-margin businesses and AI-powered innovations. However, its heavy investment in AI and cloud infrastructure resulted in a steep decline in free cash flow, as the company prioritizes long-term strategic positioning over short-term liquidity.

Strong Revenue and Profit Growth
Tencent reported Q4 2024 revenue of RMB 172.4 billion, up 11% year-over-year (YoY), fueled by strong performance in gaming, advertising, and fintech services. The company’s gross profit surged 17% YoY to RMB 90.7 billion, benefiting from a shift toward higher-margin revenue streams such as AI-driven ad targeting and premium content creation.

Operating leverage played a key role in profit expansion, with net profit skyrocketing 85% YoY to RMB 51.5 billion. Tencent’s ability to grow profits faster than revenue highlights the success of its efficiency-driven approach​​.

Key Business Segments Performance

1. Gaming and Social Networks (VAS): Revenue from value-added services (VAS) increased 14% YoY to RMB 79 billion, with domestic gaming revenue jumping 23% YoY (RMB 33.2 billion). Tencent’s top-performing titles, including Honor of Kings, Peacekeeper Elite, and Valorant, continued to see high engagement and monetization.
   
   
2. Advertising: Tencent’s marketing services revenue grew 17% YoY to RMB 35 billion, as AI-powered ad targeting and generative AI-driven content creation improved engagement and return on investment for advertisers.
   
   
3. Fintech & Business Services: Revenue in this segment grew 3% YoY to RMB 56.1 billion, with WeChat Pay, wealth management, and enterprise services maintaining steady growth despite a cautious macroeconomic environment.
   
   
4. AI and Cloud Services: Tencent's cloud services and AI initiatives saw strong demand, but GPU shortages constrained growth, as the company prioritized AI computing for internal use over external cloud clients​.

AI as a Transformational Growth Engine
Tencent is aggressively expanding its AI ecosystem, integrating large-scale language models and multimodal AI solutions across its platforms. The company’s proprietary HunYuan AI foundation model has been deployed across Tencent’s advertising, gaming, search, and cloud services, improving efficiency and monetization.

Major AI Initiatives Driving Growth

• Yuanbao Chatbot: Tencent’s AI-native app saw its daily active users (DAUs) surge 20-fold, making it the third-largest AI app in China. Yuanbao integrates multiple AI models for search, content generation, and personalized assistance.
  
  
• Weixin AI & Search: AI-enhanced Weixin Search now powers over 90% of question-based queries, significantly improving user engagement and paving the way for new monetization opportunities through advertising.
  
  
• Gaming AI: AI-driven enhancements in game development, in-game chatbots, and content creation are streamlining production costs and improving user experiences​.

We have written a blog post discussing Tencent’s AI rollout available, you may check it out here.

Heavy AI Investments Impact Cash Flow
Tencent stepped up capital expenditures (capex), investing RMB 36.6 billion in Q4 alone, marking a 386% YoY increase. For the full year, capex reached RMB 76.8 billion, or 12% of total revenue, reflecting Tencent’s commitment to AI and cloud infrastructure expansion. The spending has largely gone toward acquiring high-performance AI chips and expanding data center capacity. Additionally, Tencent has increased hiring in AI research and engineering, though staff costs fall outside capex.

This aggressive spending significantly impacted free cash flow (FCF), which plunged 87% YoY to just RMB 4.5 billion. Management acknowledges the near-term cash flow pressure but remains confident that AI investments will yield strong long-term returns​.

Shareholder Returns and Market Outlook
Despite record-high AI investments, Tencent remains committed to returning capital to shareholders. The company raised its annual dividend by 32% to HK$4.5 per share, while reducing share buybacks from HK$112 billion to HK$80 billion to conserve cash for AI development​.

Looking ahead, Tencent’s focus on AI-driven transformation and strong profitability trends position it well for sustained growth. While cash flow may remain under pressure in the near term, its market leadership in gaming, advertising, and fintech, coupled with strategic AI expansion, ensures a promising future in the rapidly evolving digital economy. We believe Tencent is one of the primary beneficiaries of China’s focus on AI, and we are not concerned about the elevated capex or near-term reduction in free cash flow (FCF), given the long-term potential of these investments.

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Disclaimer: Data taken from Tencent's 2024 results
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