China Internet: Assessing Valuation Floor Vs Earnings Downside Sensitivity

Research evidence excerpt

China Internet: Assessing Valuation Floor Vs Earnings Downside Sensitivity

China Internet

26 June 2026 Citi Research

Valuation vs Earnings Sensitivity

As we noted in our earlier 2H26 outlook report (link), in our view, during the AI

evolution cycle, constrained compute power and high entry barriers in cloud and

chip development are shifting the competitive advantage to companies with full-

stack AI capabilities. Hence, companies that can navigate the challenges and

effectively capture value from the AI evolution, from foundational models to

complex agentic orchestration, should prevail once the dust settles and the sector

rotates back to applications and connectivity.

Although we believe the hardware momentum is far from over, if past revolutions

and transformations prove true, the power of what AI can bring to humanity will

ultimately lead to demand for social connectivity, leisure, entertainment, and the

consumption of goods and services. After the capacity build-up catches up, online

and offline services, physical products, and experiential and leisure services, all

facilitated by AI-powered applications and ecosystems, will eventually prevail.

The compelling valuations and growth opportunities in specific companies are

amplified by a sector-wide trend of robust free cash flow generation and growing

cash balances, a financial strength the market appears to be overlooking. When

analyzed on an ex-cash basis, valuations for many of these companies are even

more attractive than their headline multiples suggest.

In our view, companies with a strong core business, healthy and sustainable

profitability, and powerful cash flow generation are best positioned to navigate the

volatility of the AI evolution cycle. This resilience is further supported by an