Introduction: The ship has set sail, but the seat remains unstable.

A financial report showing revenue growth returning to double digits but profits stagnating reveals a Tencent in the midst of an 'engine replacement'.

Traditional gaming and advertising 'cash cows' remain steady, but unprecedented large-scale AI capital expenditures are dragging the income statement into a high-stakes gamble.

On August 12, Tencent Holdings released its earnings report, showing Q2 revenue of RMB 204.79 billion (+11% YoY, vs est. RMB 202.84 billion), NON-IFRS net profit of RMB 68.4 billion (+9% YoY), and profit attributable to equity holders of RMB 56.022 billion (+0.7% YoY). Q2 capital expenditures reached RMB 52.78 billion (vs est. RMB 32.14 billion).

Numerically, this appears a 'solid' performance, but another set of data reveals the iceberg beneath the surface.

Q2 capital expenditures of RMB 52.78 billion surged 176% YoY. H1 capital expenditures totaled RMB 84.72 billion, nearly double last year's same period (same period last year). Free cash flow turned negative at RMB -13.8 billion - a rare quarterly negative free cash flow for Tencent in recent years. Excluding prepayments for computing power purchases, free cash flow was RMB 37.6 billion.

Tencent is using profits from traditional businesses to feed its growing AI empire.

According to the financial report, new AI products (primarily Hy, Yuanbao, CodeBuddy, WorkBuddy, and Xiaowei) dragged down Q2 Non-IFRS operating profit by approximately RMB 10.5 billion.

This isn't profit falling short of expectations - profits were intentionally suppressed.

01 The 'New Crown Prince' Debuts

Tencent systematically described its AI strategy for the first time in the financial report - spanning 'intelligence, applications, and infrastructure'.

At the intelligence layer, the July 2026 official release of Hy3 saw significant performance improvements over the preview version, outperforming most similarly sized models. According to OpenRouter token consumption statistics, Hy3 has consistently ranked among the global top three since launch. A larger-scale Hy4 with over 1 trillion parameters is planned for near-term release.

At the application layer, WorkBuddy and CodeBuddy emerged as the brightest stars. The financial report explicitly states - WorkBuddy is currently China's most widely used AI efficiency agent service. According to Analysys data, WorkBuddy's desktop monthly visits exceeded 20 million in June 2026. CodeBuddy dominates the AI programming tool track (track), covering over 200 programming languages and frameworks.

Tencent's Q1 financial report first separately listed the financial impact of new AI products, a practice that continued in Q2.

According to media reports, WorkBuddy transformed from a side project with a dozen-person team in March to a Ma Huateng-supervised initiative with a 100-person team and green lights across six business groups in under six months. Tencent internally even calls it the 'new crown prince'.

Currently, WorkBuddy still acquires users through a free version + points subsidy model, with enterprise version charging per seat, though most interviewed users still use it for free. According to media reports, 88% of enterprises have piloted AI agents, but only 24% have achieved ROI across multiple use cases. The 'high penetration, low return' dilemma of AI office tools also confronts Tencent.

At the infrastructure layer, Tencent significantly increased computing power procurement. A substantial portion of Q2 capital expenditures supported Hy model upgrades, WorkBuddy and CodeBuddy inference demands, WeChat AI initiatives, and AI capability building across products and services. The financial report states: 'This will help us convert application and model usage into revenue.'

These five words - 'convert into revenue' - represent the core suspense ( suspense /uncertainty) of the entire AI strategy.

02 The Oldest Business Shoulders the 'Profit Burden'

Beyond the AI halo, Tencent's oldest business - gaming - remains its most reliable profit source.

Q2 value-added services revenue reached RMB 98.414 billion (+8% YoY). Domestic market gaming revenue was RMB 47.3 billion (+17% YoY), hitting a recent high. International market gaming revenue was RMB 18.6 billion (+4% YoY at constant exchange rates).

The domestic gaming surge came from breakthroughs in two 'evergreen games' and a new hit.

Delta Force and Valorant both set all-time highs for average daily active accounts in Q2. According to Tencent's definition of 'evergreen games' - quarterly average DAU exceeding 5 million (mobile) or 2 million (PC) with annual revenue over RMB 4 billion - these two products firmly occupy the 'evergreen' tier.

Roco Kingdom: World became the biggest dark horse in the Chinese market in Q2. According to QuestMobile and Sensor Tower data, this game ranked first among all newly released mobile games that quarter by both average DAU and revenue. As a self-developed IP adaptation, its high-margin characteristics directly boosted profitability in the value-added services segment.

Internationally, Miniclip's Arrows–Puzzle Escape became the world's most downloaded mobile game in Q2, driving strong advertising revenue. However, revenue declines in some Supercell games and exchange rate fluctuations dragged down overall international gaming growth.

Social networks revenue was RMB 32.5 billion (+0.8% YoY). This former growth engine now serves as a 'stabilizer'.

The gaming business's gross margin improved from 60% YoY to 64%, hitting a recent high. The rising proportion of high-margin self-developed game revenue was the core driver. Amid significant AI investment squeezing profits, the gaming business's 'profit-generating capacity' becomes particularly precious.

03 The First Battle Report from the AI War

Marketing services was the standout segment in Q2. Revenue reached RMB 43.565 billion (+22% YoY), the fastest growth among Tencent's four business lines.

The growth engine was AI.

The financial report contains a passage worth reading word by word: 'Benefiting from continuous optimization of AI-driven ad recommendation models (determining which ads to show each user per impression), upgrading the intelligent advertising product matrix Tencent Marketing AIM+ (helping advertisers purchase high-quality impressions), and integrating closed-loop marketing capabilities within the WeChat ecosystem (enabling more effective ad placements for WeChat integrated services like mini-games and WeChat Stores on Tencent-managed ad platforms).'

Three interlocking layers:

Layer 1: AI recommendation models. Video Account user time spent grew over 20% YoY, with AI-driven mixed ranking systems continuously improving ad matching efficiency. Behind each impression, an AI makes real-time judgments about 'what ad this person is most likely to click now.'

Layer 2: AIM+ intelligent advertising. This advertiser-facing product matrix transforms advertising from 'buying traffic' to 'buying results'. AI not only determines which ads to show but helps advertisers optimize placement strategies for end-to-end automation.

Layer 3: WeChat ecosystem closed loop. Mini-games, WeChat Stores, short dramas - these transaction-closed scenarios within WeChat are becoming new growth poles for ad placements. Advertisers aren't just 'buying impressions' but 'buying conversions.'

Most major industries increased marketing spending on Tencent's platform in Q2. Marketing services gross margin was 57%, roughly flat YoY, indicating that increased depreciation and operating costs from AI infrastructure were largely offset by revenue growth.

If Tencent's AI strategy is a war, marketing services is the first battlefield showing 'results.'

04 Eight Suggestive Words

Financial technology and enterprise services revenue was RMB 60.286 billion in Q2 (+9% YoY). This growth rate isn't eye-catching in the financial report, but the structural changes behind it warrant attention.

Financial technology services revenue grew primarily due to increased income from commercial payments, wealth management, and consumer lending services. Payment business growth remained steady amid macro consumption trends, while wealth management and consumer lending showed stronger growth elasticity.

Enterprise services revenue growth was directly attributed to 'rising demand for AI-related services.' The financial report mentioned that cloud services revenue growth benefited from AI incremental contributions, international business expansion, and a more favorable pricing environment.

A more favorable pricing environment - these eight words carry significant implication.

For years, China's cloud market was mired in price wars, with Alibaba Cloud, Tencent Cloud, and Huawei Cloud repeatedly cutting prices, compressing industry profit margins. The AI demand boom is changing this dynamic. Enterprises need more than just storage and computing power - they require model training, inference services, AI application development platforms - these high-value-added services command far stronger pricing power than generic cloud computing.

According to media reports, Tencent Cloud is benefiting from the integrated 'model + computing power + security' demand driven by WorkBuddy Enterprise Edition.

If WorkBuddy becomes the enterprise gateway to AI, Tencent Cloud has an opportunity to follow - this is the ideal script for 'Cloud + AI' synergy.

However, the financial technology and enterprise services segment's gross margin was 52%, roughly flat YoY. AI-driven cloud services growth hasn't yet significantly boosted gross margins.

05 The Balancing Act of 'Having It Both Ways'

Beyond the financial report, Tencent maintains another identity unchanged - as one of China's largest tech investors.

As of June 30, 2026, the fair value of Tencent's equity in listed investment companies (excluding subsidiaries) was RMB 487.2 billion, with the book value of equity in unlisted investment companies at RMB 387.9 billion. Together exceeding RMB 870 billion, this 'invisible empire' represents about one-fifth of Tencent's own market capitalization.

But this empire is undergoing value reassessment.

The fair value of the listed investment portfolio declined about 11% from RMB 547.1 billion at the end of Q1. Financial assets measured at fair value through other comprehensive income saw fair value change losses of about RMB 50.8 billion in H1 - primarily from market fluctuations in listed equity holdings.

On the investment side, Tencent continued reducing positions in Q2.

In July, Tencent sold shares in a listed associate operating a leading content community and social platform. Additionally, due to shareholder rights changes following a restructuring at an associate company, about RMB 5.274 billion in investments were reclassified from associates to financial assets measured at fair value.

At the other end of capital allocation, share buybacks continued unabated.

In H1, Tencent repurchased and fully canceled 50.03 million shares for a total consideration of about HKD 24.4 billion.

Calculated against the June 30 share capital, the repurchase ratio was about 0.55%. This pace continues Tencent's long-term strategy of 'returning value to shareholders through buybacks.'

However, net cash at the end of Q2 plunged 60% from RMB 146.9 billion at the end of Q1 to RMB 58.2 billion. Capital expenditure payments of RMB 59.3 billion and 2025 dividend payments of RMB 41.6 billion were the main drains.

This means Tencent is advancing both AI investments and shareholder returns at the expense of cash reserves.

This represents a balancing act of 'having it both ways.'

The patience of capital markets depends on whether AI investments can form commercial closed loops within a foreseeable timeframe.

06 Epilogue

On the day of the earnings release, Tencent's stock closed at HKD 461.6 (-1.95%).

The market gave its most direct response to this financial report where 'profits were eaten by AI.'

Yet many remain bullish on Tencent.

The market's divergence essentially reflects different answers to one question: Are AI investments 'costs' or 'investments'?

If AI is a cost, then the RMB 52.7 billion in quarterly capital expenditures represents a profit 'black hole,' warranting a discount to Tencent's valuation. If AI is an investment, then these expenditures are building a 'new Tencent' of 'intelligence + applications + infrastructure,' with today's profit compression paving the way for tomorrow's growth trajectory.

Ma Huateng's 'ship' metaphor at the May 13 shareholders' meeting perhaps provides the best annotation.

'A year ago we thought we'd boarded the ship, then realized it was leaking. Now we feel we're standing on it but can't sit comfortably yet - we still hope the ship can speed up,' Ma admitted at the meeting.

These two images precisely correspond to the two phases of Tencent's AI journey.

'A year ago thinking we'd boarded the ship, then realizing it was leaking' - refers to how C-side AI conversation products (like Yuanbao) burned money unsustainably, with early AI foundational capabilities not standing out.

'Now feeling we're standing on it but can't sit comfortably yet' - describes how Tencent finally found in WorkBuddy's office agent scenario the position closest to token commercial closed loops, but AI commercialization validation has only just begun.

The ship has set sail, but the seat remains unstable - this probably best describes Tencent AI's current reality.