As competition in artificial intelligence (AI) intensifies in China, tech giant Tencent has ramped up its AI investments, pouring over 11 trillion won (approximately $8 billion) into capital expenditures in the second quarter. The company has integrated AI into its existing businesses, including advertising and gaming, contributing to revenue growth.
Tencent announced on August 13 that its capital expenditures for the second quarter surged by about 179% year-on-year to 52.784 billion yuan (around $8 billion). This figure significantly exceeded market expectations of 32.14 billion yuan and accounted for more than a quarter of the company’s second-quarter revenue.
Despite being perceived as lagging behind competitors like Alibaba and ByteDance in the AI race, Tencent is making substantial investments in AI models and computing infrastructure. Tencent President Liu Qiangdong stated during a conference call, "Significant investment in computing power is necessary to successfully advance AI-based new businesses. In the long run, AI-driven operations will provide strong cash flow and investment returns for the group."
Alongside its large-scale AI investments, Tencent is also accelerating the monetization of AI by integrating it into its existing operations in gaming, advertising, and social media.
Tencent's second-quarter revenue reached 204.8 billion yuan, an 11% increase from the same period last year, surpassing Bloomberg's forecast by about 1%. Notably, advertising revenue grew by 22%, exceeding the first quarter's growth rate of 20%. Contrary to initial concerns about a slowdown in the advertising market due to China's economic downturn, improvements in advertising efficiency through AI contributed to revenue growth. Domestic gaming revenue also surged by 17%, maintaining a solid upward trend.
Tencent Chairman Ma Huateng noted during the earnings announcement, "As we enter the third quarter, we are making significant progress in building a new Tencent based on intelligence, applications, and infrastructure."
The company is also focused on enhancing its AI model competitiveness. It actively utilizes its large language model (LLM) 'Hy3' in services like the AI agent 'WorkBuddy' and plans to develop next-generation AI models that rival top-tier models from DeepMind and OpenAI by the end of the year.
Bloomberg commented, "While Tencent still has a long way to go compared to ByteDance and Alibaba, the online advertising sector is rapidly growing, providing a solid foundation for Tencent to secure the necessary funds for technological investments."
However, aggressive investments in AI have impacted Tencent's cash flow. The company's net profit rose by only 0.7% to 56.022 billion yuan, while free cash flow turned from a surplus of 43 billion yuan in the same period last year to a deficit of 13.8 billion yuan (approximately $2.9 billion).
Despite this, Tencent remains committed to investing in AI infrastructure. Liu emphasized, "Investment in AI infrastructure is not expected to increase steadily each year, so when assessing our spending capacity, we must consider not only free cash flow but also cash on hand, the value of our investment portfolio, operating cash flow, and appropriate borrowing capacity."
* This article has been translated by AI.
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