M BluePaper May 13, 2025 09:00 PM GMT Global Technology China – AI: The Sleeping Giant Awakens China is focused on how AI can drive industrial transformation at scale and turn constraints into opportunities. A top-down approach, aligning strategy, ecosystem, standards and industry-specific innovation to an already robust infrastructure, is helping unlock AI's potential in China. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be a ...

Core Insights - Skillful Craftsman Education Technology Limited has announced the hiring of two experienced professionals to enhance product/service innovation and accelerate business growth [1] Group 1: New Hires - Mr. Chunyang Yuan has been appointed as the Chief Technology Officer, bringing over 20 years of software development experience and expertise in machine learning and artificial intelligence [2] - Mr. Jie Ma has been appointed as the Chief Product Officer, with over 12 years of experience in product management and a strong background in AI and innovative product development [3] Group 2: Company Overview - Skillful Craftsman focuses on advancing technological innovation in education through digital transformation, aiming to improve teaching effectiveness and student outcomes [4] - The company is committed to integrating artificial intelligence and digital technology to create efficient, intelligent, and sustainable education solutions [4]

Investment Rating - The report maintains a "Buy" rating for Tencent, Alibaba, PDD, and Meituan, indicating positive expectations for their performance in the upcoming quarters [6][9][10][11]. Core Insights - The report anticipates strong 1Q results for major players like Tencent, Alibaba, and JD, driven by sustained consumer spending and growth in advertising and cloud services [1][2]. - Key investor focuses include the competitive landscape in food delivery, AI capital expenditures, and geopolitical developments affecting cross-border business models [2][11]. Summary by Company Tencent - Expected 1Q advertising revenue growth of +18% and overall group revenue growth of +10% year-over-year [1][12]. - Focus areas include AI-driven adtech upgrades, sustainability of gaming revenue, and implications of recent policy changes on WeChat payment trends [7][12]. Alibaba - Anticipated 1Q Customer Management Revenue (CMR) growth of +9% and group EBIT growth of +12% year-over-year [1][13]. - Key focuses include Alibaba Cloud's revenue growth driven by AI demand, competitive landscape in eCommerce, and implications of new foreign chip restrictions [7][13]. JD - Expected 1Q Retail revenue growth of +28% year-over-year, with a focus on the impact of JD's entry into food delivery on overall profitability [11][12]. - Key discussions revolve around updated profit guidance for FY25 and strategies to maintain user engagement in food delivery [11][12]. PDD - Anticipated solid growth in core local commerce profits, with a focus on the implications of Temu's business model changes and competitive dynamics in the eCommerce space [10][14]. - Key focuses include GMV growth drivers and the impact of geopolitical policies on business operations [10][14]. Meituan - Expected 1Q revenue growth of +17% year-over-year, with a focus on maintaining leadership in food delivery amidst increased competition [10][16]. - Key discussions include the sustainability of core local commerce profits and the impact of new initiatives on overall profitability [10][16].

Summary of Key Points from the Conference Call Industry Overview - The focus of the conference call is on the **China Internet** industry, specifically the competitive dynamics between **JD** and **Meituan** in the food delivery sector [1][12]. Core Insights and Arguments 1. **E-commerce Share Competition**: JD's entry into food delivery is primarily a defensive move to protect its General Merchandise market share from Meituan's growth in Instashopping [2][14]. 2. **Growth Projections**: Meituan's Instashopping is projected to generate approximately **RMB330 billion** in Gross Transaction Value (GTV) by 2025, while JD's General Merchandise GMV is expected to exceed **RMB2 trillion** this year [2][14]. 3. **Order Volume Dynamics**: JD reported reaching **10 million daily food delivery orders**, largely due to heavy user subsidies and minimal merchant monetization [3][17]. 4. **Profit Impact on Meituan**: The pressure from JD's growth is expected to affect Meituan's order volume more than its profits, as larger chain restaurants, which are less reliant on online traffic, dominate the short-tail dining segment [4][22]. 5. **Market Sentiment and Valuation**: Despite significant market sell-offs, the risk-reward for both JD and Meituan is viewed positively, with expectations that the peak fear of competition has already occurred [5][54]. 6. **Investment Implications**: JD's strategy may involve transitioning from aggressive order volume growth to establishing a sustainable unit economics model, potentially leading to charging merchants a take rate [7][19]. Additional Important Insights 1. **Long Tail vs. Short Tail Demand**: The restaurant demand is characterized as long tail, with JD focusing on the shorter tail, which is less profitable and occupied by larger chain operators [3][20]. 2. **Rider Incentives**: JD has begun reducing rider incentives and is asking merchants to share the burden of user subsidies, indicating a shift in strategy to manage losses [3][7]. 3. **Competitive Landscape**: The competition between JD, Meituan, and Alibaba is expected to drive e-commerce share gains at the expense of other peers, suggesting a broader impact on the industry [8][24]. 4. **Valuation Comparisons**: Current valuations for JD and Meituan are seen as attractive, with JD trading at approximately **7x** 2026E PE and Meituan at **13x** 2026E PE [10][52]. 5. **Future Outlook**: Both companies are expected to improve as competition rationalizes, with investors likely to reassess valuations based on 2026E PE multiples [54][55]. Financial Forecasts - **JD's Revenue Projections**: Expected to reach **RMB1.27 trillion** in 2025, with a non-GAAP operating profit of **RMB46.94 billion** [66]. - **Meituan's Revenue Projections**: Expected to reach **RMB386.49 billion** in 2025, with a non-GAAP net income of **RMB49.20 billion** [65]. This summary encapsulates the key points discussed in the conference call, highlighting the competitive dynamics, financial projections, and strategic implications for JD and Meituan within the China Internet industry.

Investment Rating - The report maintains a "Buy" rating for both JD and Meituan, indicating favorable risk-reward scenarios for investors [1][10][13]. Core Insights - JD's food delivery service has ramped up quickly, achieving 10 million daily orders within two months, which is significant compared to Meituan's approximately 65 million daily orders [1][12]. - The report outlines three potential scenarios for JD's future in the food delivery market, ranging from losing scale due to subsidy pullbacks to becoming the second-largest player [1][9][18]. - Meituan is expected to maintain its leadership in food delivery due to its extensive merchant coverage and established user base [10][11]. Summary by Sections JD's Market Entry and Performance - JD's food delivery service has seen rapid growth, doubling its daily orders from 5 million to 10 million in a short period [12][28]. - The company has implemented a Rmb10 billion subsidy program to attract users and has a zero-commission policy for new merchants [28][29]. - JD's long-term commitment to food delivery is supported by strategic investments and management changes [2][10]. Competitive Landscape - The food delivery market is becoming increasingly fragmented, with Meituan and Ele.me responding to JD's entry with their own competitive strategies [2][29]. - Meituan's unique competitive advantages include its large local service merchant network and a strong in-house delivery system [10][11]. - The report anticipates that the competitive dynamics will evolve as JD and Alibaba continue to invest in their food delivery operations [7][10]. Financial Projections and Valuations - The report projects significant upside potential for both JD and Meituan, with target price increases of 56% for Meituan and 53% for JD over the next 12 months [1][26]. - JD's potential EBIT impact varies across scenarios, with estimates ranging from Rmb7 billion to Rmb14 billion depending on market performance [8][9][18]. - Meituan's food delivery is valued at HK$83 per share, based on projected daily orders and EBIT per order [11][60]. Scenario Analysis - Scenario 1 suggests JD could shrink to below 5 million daily orders if subsidies are removed, leading to a significant EBIT impact [9][15]. - Scenario 2 maintains JD's order volume at 8-12 million per day, resulting in a moderate EBIT drag [9][17]. - Scenario 3 envisions JD becoming the second-largest player with daily orders reaching approximately 20 million, significantly impacting both JD and Meituan's EBIT [8][19]. Market Dynamics and Future Outlook - The report highlights the ongoing competition and strategic responses from Meituan and Ele.me, indicating a need for continuous adaptation in the market [2][29]. - JD's entry into food delivery is expected to shift the competitive landscape, with implications for pricing and market share among the key players [1][7][10].

Investment Rating - The report maintains a positive outlook for the China equity market, with a base case index target for MXCN at HK$80 for 2025, implying a 30% upside from current levels [17][26]. Core Insights - The report indicates a broad-based recovery in the MXCN/CSI300 indices, driven by national team buying and expectations of new policy easing, with a modest increase of 1.6% week-on-week [8]. - The report highlights a potential easing of US-China trade tensions, with improved macro data from China leading to a more favorable QMI reading [9]. - The investment strategy suggests a focus on high-yield sectors such as Energy, IT, and Utilities, while advising caution in Consumer Discretionary and Materials [10][36]. Market & Sector Performance - The report provides detailed sector performance metrics, showing Consumer Discretionary up 1.5% week-on-week but down 20.2% month-to-date, while Real Estate outperformed with a 3.0% increase [6]. - The MSCI China index showed a 1.5% increase over the week but a decline of 14.6% month-to-date [6]. Catalyst Calendar - The report outlines key upcoming macroeconomic events in China, including LPR announcements and housing transaction data, which could influence market movements [13]. Consensus Macro Forecasts - The report presents GDP growth forecasts for China, projecting 5.0% for Q1 2025, slightly revised from previous estimates [15]. QMI & Index Targets - The report sets specific index targets for MSCI-China and CSI-300, with the latter projected at 3,772 RMB for 2025, indicating a 10% upside potential [18]. Investment Recommendations - The report recommends a barbell strategy focusing on high-yielders and selected thematic plays in Internet and AI sectors, while advising a rotation into quality laggards [36][38]. - Specific sector recommendations include Overweight (OW) for Energy, IT, and Utilities, while downgrading Consumer Discretionary and Materials to Underweight (UW) [38].

Group 1 - Astrada Advisors provides actionable recommendations aimed at enhancing portfolio performance and uncovering alpha opportunities, backed by a strong track record in investment research at leading global investment banks [1] - The company specializes in technology, media, internet, and consumer sectors across North America and Asia, excelling in identifying high-potential investments and navigating complex industries [1] - Astrada Advisors leverages extensive local and global experience to offer unique insights on market developments, regulatory changes, and emerging risks [1] Group 2 - The research conducted by Astrada Advisors integrates rigorous fundamental analysis with data-driven insights, providing a nuanced understanding of key trends, growth drivers, and competitive landscapes [1] - The focus of the company is to empower investors with timely research and a comprehensive view of industry dynamics, especially in volatile markets or when exploring new trends [1] - Astrada Advisors is committed to delivering superior insights to facilitate informed investment decisions [1]

14 April 2025 China Internet China Internet: The adults in the room, and the cymbal-banging monkey Robin Zhu +852 2123 2659 robin.zhu@bernsteinsg.com Charles Gou +852 2123 2618 charles.gou@bernsteinsg.com Min-Joo Kang +852 2123 2644 minjoo.kang@bernsteinsg.com Charlie Peng +81 3 6777 6993 charlie.peng@bernsteinsg.com Yes, tariffs. But fade sentiment extremes (again). Discussions on US trade tariffs and their knock-on impacts have dominated our discussions with investors since Q4 reporting. With the headline ...

Investment Rating - The report does not explicitly provide an investment rating for the industry or specific companies Core Insights - Investor concerns regarding ADR de-listing risks have resurfaced due to escalating US-China trade tensions and regulatory risks highlighted by the America First Investment Policy [1][9] - The US-China trade tensions have reached unprecedented levels, with effective US tariffs on Chinese imports reaching 107% and Chinese tariffs on US goods at 144% as of April 2023 [9] - The US-China Relations Barometer indicates that bilateral frictions are at two-year highs, contributing to increased volatility in global capital markets [8][9] - The potential for US investors to liquidate approximately US$800 billion worth of holdings in Chinese stocks if banned from investing in Chinese securities has been highlighted [9] Summary by Sections ADR De-listing Risks - ADR de-listing risks have returned to the forefront due to regulatory gaps on audit inspections between the US and China, particularly under the Holding Foreign Companies Accountable Act (HFCAA) [11] - The SEC identified five Chinese stocks as Commission-Identified Issuers (CII) under the HFCAA in March 2022, leading to a significant drawdown in the ADR index [11] - The PCAOB and CSRC signed an agreement in August 2022 to allow PCAOB access to audit papers of Chinese ADRs, which has eased some concerns [11] Mechanisms for De-listing - De-listing can be voluntary or involuntary, with involuntary de-listing typically occurring faster and putting pressure on share prices [17] - Forced de-listing can be triggered by accounting fraud, non-compliance with HFCAA, US sanctions, or violations of Chinese regulations [17] - A simplified process for de-listing includes investors selling before the last trading day and potentially trading on the OTC market [17][20] Share Fungibility Mechanism - The share fungibility mechanism allows for the conversion between ADS and HK shares, which is effective for companies with dual primary listings or ADR/HK secondary listings [25] - The conversion process generally takes two business days, and no new shares are created during this process [25][24] Impact on Investors - US institutional investors currently hold around US$830 billion in Chinese stocks, with significant potential selling pressure if forced to liquidate [32][34] - Retail ownership in Chinese ADRs is estimated to be over US$370 billion, with companies having high retail ownership facing stronger selling pressures [32][34] - Passive investment vehicles like ETFs may be significantly impacted by ADR de-listing, particularly those with high exposure to ADRs without HK listings [43]

Summary of Key Points from the Conference Call Industry Overview - The report assesses the valuation risk-reward for China internet mega-caps following a significant decline in China internet ADRs, with declines ranging from 7% to 18% on a specific Friday, and KWEB down 9.4% due to the announcement of additional tariffs by the US and China [1][5][6]. Core Insights and Arguments - **Valuation Metrics**: The median P/E for China internet companies is currently at 12X, with a profit growth outlook of 10-15%. There is an average upside of 34% to the 12-month target prices (TPs) across mega-caps, with a downside of 25% to trough valuations from October 2022 and September 2024 [5][6]. - **Limited US Exposure**: Most China internet companies have limited exposure to the US market, with the majority of revenues coming from domestic eCommerce and advertising. Notably, PDD's Temu platform has diversified its user base significantly, reducing US contributions from 100% in late 2022 to less than 15% by February 2025 [5][6][12]. - **Domestic Focus Preference**: There is a preference for domestically-focused businesses due to potential domestic policy easing amid geopolitical uncertainties and tariff escalations. The report suggests that higher-than-expected US tariffs may lead to further domestic policy support [5][6]. - **Investment Strategy**: The report outlines a dual-pronged investment strategy focusing on domestic policy beneficiaries and defensive gaming companies with solid global footprints. Key stock ideas include Tencent, Xiaomi, and PDD, with PDD being valued at 9X P/E or 6X ex-cash, indicating a lack of market value ascribed to Temu [6][7]. Additional Important Insights - **Capex Forecast**: The total capital expenditure (Capex) for major players in the China internet sector is expected to grow by 25% year-over-year in 2025. The new tariffs could lead to higher prices for US chips, potentially affecting AI Capex [17][20]. - **Revenue Growth Trends**: The report highlights a correlation between sales growth and valuations, indicating that China internet valuations are sensitive to top-line revisions rather than earnings revisions [23][26]. - **International Revenue Contributions**: The report provides insights into the overseas revenue contributions of key China internet companies, with notable drops in international revenue contributions for companies like Xiaomi due to a ramp-up in domestic EV revenue [10][11]. - **Market Performance**: The report includes a detailed performance analysis of various companies, showing significant fluctuations in market cap and P/E ratios, with Alibaba, Tencent, and JD.com being highlighted for their respective valuations and growth prospects [29][30]. This summary encapsulates the critical insights and data points from the conference call, providing a comprehensive overview of the current state and outlook of the China internet industry.