China Internet Sector "Latest thoughts and key debates" Fong

Research evidence excerpt

China Internet Sector "Latest thoughts and key debates" Fong

substantial earnings driver. This is because part of the incremental revenue (ads,

payments) could potentially be redistributed from existing users in Mini Programs, not to

mention the computing scale needed to serve of 1.4bn users. Instead, we see greater

opportunity in Tencent's ability to integrate its AI models/agents into broader

applications, leveraging Weixin's high-frequency usage (eg, Workbuddy or ima).

Alibaba remains one of the more well-owned names due to its direct AI exposure. Key

investor concerns, ranked by significance, include surging costs on AI-related

investments (in the All Others segment), elevated consensus expectations that left

limited room for upside surprises, and slower CMR growth ahead amid softer macro

conditions. In short, we believe a re-rating would likely require the stabilisation of

downward earnings revisions, wherein incremental AI investments are offset by the

rapid reduction in quick commerce losses.

Investors believe JD's valuation is undemanding; some plan to revisit the name after the

challenging YoY comparison for Q226, alongside stabilised new business quarterly

investment. With the sector trading at relatively low valuations, investors are opting to

avoid PDD due to its limited earnings visibility. That said, given the strong US equity

market performance QTD, its Q2 investment income may deliver positive surprises after

its Q1 miss. Among the mid-cap names, we observe investor interest in Kuaishou for its

upside optionality in Kling, and NetEase for its anticipated new game release in July. For

Baidu, while investors view the upcoming Kunlunxin IPO as a positive catalyst, the

uncertainty over the timing of the IPO may continue to cause stock fluctuations. Longer