JPMorgan maintained an "overweight" rating on Tencent Holdings and a HK$690 target price, arguing the company is in an AI investment cycle running through 2026 to 2027. The bank said 2026 could be the low point for earnings growth, with adjusted EPS expected to rise about 2%, before recovering to a 10% to 15% range in 2027 as AI monetization gradually offsets investment costs. Tencent's second-quarter revenue rose 11% year on year to 204.8 billion yuan, while non-IFRS net profit increased 9% to 68.4 billion yuan. Marketing services revenue climbed 22%, domestic games rose 17%, and fintech and business services grew 9%. Cloud growth also improved to just above 20% after a price increase in May. JPMorgan said investors may read flat quarter-on-quarter profit and negative free cash flow as signs of stalled growth or cash burn, but it believes Tencent's core businesses can still fund the current AI spending cycle. It estimated second-quarter spending on new AI products including Hunyuan, Yuanbao, CodeBuddy, WorkBuddy and Xiaowei at about 10.5 billion yuan, up from about 8.8 billion yuan in the first quarter. Reported free cash flow was negative 13.8 billion yuan in the second quarter, but adjusted free cash flow was positive 37.6 billion yuan after excluding prepayments for computing capacity. JPMorgan said Tencent can continue supporting AI investment through core operating cash flow and by partially disposing of an equity investment portfolio worth more than 700 billion yuan. The bank is watching for Hunyuan 4 to be released within four years, deferred recognition of revenue from WorkBuddy's paid tier, and testing and possible commercialization of WeChat Agent Xiaowei. It said Xiaowei's link to WeChat's social graph, merchant network, payments and mini-program ecosystem could become a key factor in how the market reassesses Tencent's AI value if the company later discloses user, GMV (gross merchandise value), or monetization data. JPMorgan said it would turn more cautious on Tencent's AI returns if third-quarter advertising growth falls below the high teens, quarterly AI spending rises above 12 billion yuan to 13 billion yuan without clear revenue offsets, or Hunyuan 4 is delayed until after 2026.