Summary of the Conference Call on China Internet Sector Industry Overview - **Sector**: China Internet Sector - **Growth Forecast**: Overall ad growth in China is expected to remain stable at **9.5%** in 2026, slightly down from **9.6%** in 2025, outperforming underlying consumption growth projected at **4.8%** and **4.4%** for 2025 and 2026 respectively [2][3] Key Drivers of Growth - **Demand from Non-Cyclical Verticals**: Significant growth is anticipated in sectors such as gaming (both app-based and mini-games), internet services (driven by short dramas and AI tools), and education (primarily hardware) [2] - **Supply-Side Upgrades**: Improvements in ad technology, particularly through AI, are expected to enhance ad efficiency and unlock new budgets, partially offsetting macroeconomic headwinds [2][3] Impact of New Ad Tax Policy - **Policy Details**: Effective from October 1, 2025, marketing expenses exceeding **15%** of revenue (or **30%** for cosmetics, healthcare, and non-alcoholic beverages) will no longer be tax-deductible, increasing the cost of sales and marketing (S&M) for advertisers [3] - **Limited Negative Impact**: The overall impact of the new tax policy is less severe than anticipated, with factors such as variations in enforcement and reclassification of costs helping to mitigate the effects [3] AI's Role in Advertising - **Increased Ad Budgets**: Post-2025, ad agencies reported a **high single-digit to 10%** increase in ad budgets on platforms with advanced AI capabilities [4] - **Key Use Cases**: AI is improving ROI by up to **10%** through better targeting, ad material generation, and bidding strategies. Adoption of AI-powered platforms is also increasing, lowering entry barriers for SMEs [4] Company-Specific Insights - **Tencent**: Expected to maintain ad revenue growth of **+18% YoY** in Q4, supported by ad tech upgrades and improved connectivity within its ecosystem [8] - **Bilibili**: Advertiser perceptions are improving due to better collaboration with major platforms, leading to enhanced ad ROI [8] - **Kuaishou**: Noted for significant ad tech improvements, positioning it as a leader in ad efficiency [8] - **Baidu**: Continues to face revenue decline but is seeing increased contributions from AI-native products [8] Stock Recommendations - **Preferred Stocks**: The report favors Tencent, Bilibili, and Kuaishou due to their strong growth drivers and positions in the ad tech landscape [9] Risks and Challenges - **Competitive Landscape**: The sector faces risks from evolving competition, fast-moving technology trends, and regulatory changes [13] - **Profitability Concerns**: Companies like JD.com are under scrutiny for low visibility on profitability and the impact of restructuring efforts [14] Conclusion - The China Internet sector is poised for stable growth driven by advancements in ad technology and demand from non-cyclical sectors, despite challenges posed by new tax policies and competitive pressures. Key players like Tencent, Bilibili, and Kuaishou are well-positioned to capitalize on these trends, while risks remain in the form of regulatory changes and market competition [2][3][9]

Summary of Key Points from the Equity Research Report Industry Overview - **Industry**: Advertising - **Key Trend**: The advertising industry is expected to benefit significantly from AI-powered content generation and ad placement optimization, with a projected faster-than-expected adoption of AI technologies in the sector [2][11]. Core Insights - **Earnings Impact**: The earnings boost from AI for advertising companies is currently underestimated. The advertising sector has seen a 6% year-to-date increase, lagging behind the CSI Media Index, which is up 9% [2]. - **Domestic AI Adoption**: Domestic companies like Focus Media and BlueFocus are accelerating AI adoption to enhance efficiency and client acquisition [2]. - **Meta's Success**: Meta's application of AI has led to significant improvements in user engagement and advertising revenue, with a quarterly year-on-year growth of 19-27% since 3Q23 [3][19]. Company-Specific Insights Focus Media (002027 CH) - **Rating**: Buy, with a target price of RMB8.20. - **Performance**: Share price increased by 2% year-to-date, underperforming the sector due to market concerns over consumption recovery and AI's potential impact on revenue growth [4][25]. - **Valuation**: Currently trading at a 17x 2025 estimated PE, which is below its historical average. The company is expected to have a 5.8% dividend yield in 2025, providing valuation support [4][38]. - **AI Utilization**: Focus Media is leveraging AI to generate advertising materials quickly, reducing production cycles by 30-50% and improving ad conversion rates through its intelligent advertising platform [26][27]. BlueFocus (300058 CH) - **Rating**: Hold, with a revised target price of RMB9.50 (previously RMB7.40). - **Performance**: Share price increased by 5% year-to-date, benefiting from AI applications but facing valuation concerns as it trades at a 56x 2025 estimated PE, significantly above peers [5][43]. - **AI Strategy**: The company has launched an "All in AI" strategy to enhance its marketing capabilities and has seen a 233% increase in revenue per employee since 2019 due to AI integration [44][47]. - **Overseas Growth**: BlueFocus's overseas revenue is expected to grow at a CAGR of 15% from 2024-2026, driven by its AI-powered programmatic platform [46]. Financial Projections - **Focus Media**: Expected net profit CAGR of 12% from 2024-2026, with a projected net profit of RMB5,875 million in 2025 [4][67]. - **BlueFocus**: Adjusted net profit estimates for 2025 and 2026 are RMB458 million and RMB575 million, respectively, reflecting a decrease due to non-recurring losses [5][55]. Risks and Catalysts - **Focus Media Risks**: Key risks include weaker-than-expected consumption recovery, intense competition, and challenges in cost control [42]. - **BlueFocus Risks**: Risks include intense competition in the marketing communication services industry and potential slowdowns in AIGC-related business development [66]. Conclusion - The advertising industry is poised for growth driven by AI advancements, with Focus Media and BlueFocus positioned to capitalize on these trends. However, both companies face unique challenges and market dynamics that could impact their performance in the near term.

Investment Rating - The report maintains a BUY rating for Weibo, with a target price (TP) of US$14.50, down from the previous TP of US$15.00, indicating a potential upside of 39.2% from the current price of US$10.42 [3][6]. Core Insights - Weibo's 4Q24 results showed net revenue of US$457 million, largely flat year-over-year (YoY) on a constant currency basis, and non-GAAP net income grew by 40% YoY to US$107 million, exceeding consensus estimates by 9% due to effective operational expense control [1][6]. - The overall advertiser sentiment for FY25 remains mixed, with certain sectors like 3C and e-commerce increasing ad budgets due to national subsidy programs, while others like cosmetics and personal care are cautious [1][6]. - The forecast for Weibo's total revenue in FY25 is a growth of 2% YoY on a constant currency basis, with a reduction in FY25-26E earnings forecast by 3-5% due to a soft revenue outlook and increased AI investments [1][6]. Financial Performance - FY24 net revenue was US$1.75 billion, up 1% YoY on a constant currency basis, while advertising revenue in 4Q24 declined by 3% YoY to US$386 million [1][6]. - VAS (Value-Added Services) revenue increased by 18% YoY to US$71 million in 4Q24, driven by membership and game-related revenue growth [6]. - Monthly Active Users (MAUs) declined by 1% YoY to 590 million in December 2024, but the Daily Active Users (DAU) to MAU ratio improved to 44.1% [6]. Revenue and Profitability Forecast - The revenue forecast for FY25 is US$1.77 billion, with adjusted net profit expected to be US$481 million, reflecting a slight decrease from previous estimates [2][7]. - The adjusted net profit margin is projected to be 27.2% for FY25, down from 27.3% in FY24, primarily due to increased investments in AI [6][12]. - The report anticipates a gross margin of 79.0% for FY25, consistent with previous years [7][12]. Shareholding and Market Data - Major shareholders include Sina with 37.3% and Alibaba with 28.9% [4]. - The market capitalization of Weibo is approximately US$2.45 billion, with an average trading volume of US$13.4 million over the past three months [3][4].