5 February 2026 | 7:58AM HKT Equity Research NAVIGATING CHINA INTERNET Addressing investor questions/focus areas around AI investment strategies, regulations and policies Since the publication of our 2026 China Internet Outlook, where we highlighted our expectations for 2026 to be a pivotal year of higher AI investments and the defending of core positionings by China Internet mega caps, investor focuses and questions have centered around: (+/-) the intensified contest of consumer AI super apps amongst mega- ...

Vi e w p o i n t | 03 Feb 2026 00:03:27 ET │ 20 pages China Economics The Macro-Micro Disconnect of AI-Driven New Economy See Appendix A-1 for Analyst Certification, Important Disclosures and Research Analyst Affiliations. Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this rep ...

Vi e w p o i n t | 03 Feb 2026 00:03:27 ET │ 20 pages China Economics The Macro-Micro Disconnect of AI-Driven New Economy CITI'S TAKE China's AI-driven new economy is catching up with the global frontier, fueling a tech-heavy equity rally. For GDP accounting, the new economy is now macro-relevant and may fully offset property's drag. The promising macro story, however, has failed to lift micro sentiment. AI may raise the risk of "jobless growth", deepening the macro-micro disconnect. Our estimates – conserv ...

Global Research ab 26 January 2026 First Read China Internet Sector China ad pulse check: 2026 outlook and impacts from new ad tax policy Growth: 2026E stable; bottom-up bright spots to offset soft macro Growth: We expect overall China ad growth to remain stable at 9.5% in 2026E (2025E's 9.6%), based on takeaways from our recent channel checks with leading ad agencies in China and catch-ups with major listcos. We expect ad growth to still outperform underlying consumption growth (UBSe 4.8/4.4% in 2025/26E r ...

Summary of Key Points from the Conference Call Industry Overview - The focus is on the **China Internet** sector, particularly regarding **AI applications** and **advertising technology** (adtech) as key themes for 2026 [1][2]. Core Themes for 2026 1. **AI/Adtech Evolution**: - Shift towards ROI-based advertising and new marketing strategies like Answer & Generative Engine Optimization (AEO/GEO) [1][19]. 2. **AI Model Breakthroughs**: - Focus on long-context, multi-modal models, and cost-efficient architectures [1][22]. 3. **Proliferation of To-C Assistants**: - Emergence of AI super entry-points, impacting traditional search markets and app user traffic [1][23]. 4. **Chip Supply Dynamics**: - Access to next-generation chips will determine the competitive gap between Chinese and US AI models [1][24]. 5. **Global Market Inroads**: - Increased monetization through a mix of open and closed-source models, with a focus on subscription and API revenue streams [1][26]. 6. **AI Inference Demand**: - Continued growth in AI inference demand will drive cloud revenue and data center demand [1][27]. Company Insights - **Alibaba** and **Tencent** are identified as the best-positioned mega-cap stocks in the China internet sector for the long term [2]. - **PDD** is highlighted as a Buy idea due to its valuation discount and strong user engagement [2]. Engagement Metrics - Overall time spent on the top 400 mobile apps increased by **7% YoY** in December 2025, with notable growth in **Douyin** (+19% YoY) and **eCommerce** engagement (+10% YoY) [3][8]. - **Weixin** and **Weibo** both saw a **5% YoY** increase in time spent [8]. Sector Performance - **Cloud & Data Centers** ranked as the top sub-sector, followed by **Games & Entertainment** and **AI Models** [2][14]. - **JD** and **Taobao** showed strong growth in eCommerce time spent, with increases of **38%** and **9% YoY**, respectively [8]. Notable Trends - **AI Engagement**: Domestic AIGC application engagement rose by **16% MoM**, driven by apps like **Doubao** and **Qwen** [8]. - **Recruitment Platforms**: **Boss Zhipin** maintained leadership in time spent share at **64%** in December [12]. - **Real Estate**: **Beike Zhaofang** saw a **9% YoY** increase in MAUs [12]. Challenges and Regulatory Environment - Cross-border eCommerce faces increasing regulatory pressure, with the EU imposing a **€3 customs duty** on low-value parcels starting July 2026 [8]. Conclusion - The China Internet sector is poised for significant transformation driven by AI advancements, with key players like Alibaba and Tencent leading the charge. The focus on ROI-based advertising, AI model breakthroughs, and global market expansion will shape the competitive landscape in the coming years.

Summary of China Games & Entertainment Sector Conference Call Industry Overview - The China Games & Entertainment sector experienced a significant rally in 2025, with large and mid-cap stocks increasing by 50-80%, compared to the HSCEI's 26% rise. The strong momentum continued into 2026, with some stocks rising by 30% against a 3-5% increase in corresponding indexes [2][21][24]. Key Themes and Debates for 2026 1. **Competition from Bytedance** - Bytedance's competition is a major concern for investors, particularly in selective growth verticals such as short drama and mini-game platforms. Music streaming remains a key debate, with TME maintaining a differentiated position in ARPU and non-subs revenue growth [3][26]. 2. **Overseas Market Expansion** - Chinese game publishers, led by Tencent and NetEase, are accelerating their overseas expansion. The current market share of Chinese game publishers in overseas markets is around 15%, with expectations to increase significantly due to capital intensity, technology capabilities, and ongoing content upgrades [4][43][78]. 3. **AI Applications** - AI is expected to disrupt and benefit existing ecosystems by reducing production costs and enhancing efficiency. The gaming and advertising sectors are particularly poised for revenue uplift and efficiency gains through AI applications. The total addressable market (TAM) for AI video generation tools is projected to expand 10X by 2028 [5][54][56]. 4. **Policy Tailwinds for Content Creation** - Favorable domestic policies are expected to support content creation, leading to faster production turnaround and increased consumer demand across the entertainment industry. The number of game approvals increased by 25% year-over-year in 2025, indicating a supportive regulatory environment [10][66][69]. Company-Specific Insights - **Kuaishou** - Revenue forecast for Kuaishou has been raised to US$280 million for 2026, with expectations of ARR reaching US$350-400 million. The company is positioned to benefit from AI narratives and has seen its share price double over the past 12 months [11][12]. - **NetEase** - NetEase is trading at a discount compared to peers due to its lower overseas revenue exposure. Upcoming titles like "Sea of Remnants" and "Ananta" are expected to drive significant growth in overseas markets [13][14]. - **Bilibili** - Bilibili is anticipated to deliver strong margin expansion, with advertising revenue growth projected at 20% year-over-year in 2026. The company is expected to benefit from a turnaround in its gaming business [12][14]. - **Tencent** - Tencent's core business is expected to see low to mid-teens growth year-over-year, driven by strong game pipelines and monetization benefits from AI in advertising [14][15]. - **Tencent Music (TME)** - TME's valuation has decreased by 30% due to competition concerns, but the company maintains a strong market position with diversified revenue streams and double-digit music revenue growth [16][12]. Additional Insights - The mini-games sector is identified as the fastest-growing segment, with a 34.39% year-over-year revenue increase in 2025, reaching US$7.7 billion [77]. - The overall Chinese video game market is projected to grow at a CAGR of 7-8% through 2028, with 2025 revenues reaching a record high of 350.8 billion yuan (US$50 billion) [76]. - The integration of AI across various processes in the entertainment industry is expected to enhance cost efficiency and revenue generation, with significant implications for advertising and content creation [54][55]. Conclusion The China Games & Entertainment sector is poised for growth driven by overseas expansion, AI integration, and supportive policies. Companies like Tencent, NetEase, Kuaishou, and Bilibili are well-positioned to capitalize on these trends, although competition from Bytedance remains a critical factor to monitor.

Summary of the Conference Call on China's Internet and AI Industry Outlook for 2026 Industry Overview - The focus is on the **China Internet** industry, particularly the **AI sector** and its growth prospects in 2026, influenced by both supply and demand factors [1][2]. Key Insights AI Growth Prospects - **Supply Improvements**: Anticipated import of Nvidia H200 chips for training and expansion of domestic chip production capacity for inferencing are expected to enhance AI capabilities [2][4]. - **Demand Surge**: A breakthrough in agentic capabilities is projected to drive a significant increase in consumer (2C) adoption. Positive signals from the latest China CIO Surveys indicate a first-time uptick in enterprise (2B) spending since the second half of 2021 [2][4]. Overseas Expansion - As the domestic market faces deflationary pressures and rising competition, overseas expansion is becoming crucial. Various segments such as gaming (Tencent, NetEase), cross-border e-commerce (PDD, Alibaba), and cloud services (Alibaba, Tencent) are highlighted as key areas for growth [3][4]. - It is estimated that overseas markets contributed over **10%** of revenue for Chinese internet companies in 2025, with expectations for further growth in the next 2-3 years [3][4]. Risks and Challenges - The macroeconomic climate, competition, regulatory changes, and geopolitical tensions are identified as significant risks. A decline in consumption since Q4 2025 is impacting industry revenue growth across e-commerce, local services, and advertising [4]. - Competition in food delivery and quick commerce remains intense, particularly following the State Council's anti-involution investigation. ByteDance's continued disruption across various sectors is also noted [4]. Investment Recommendations Overweight (OW) Recommendations - **Tencent**: Identified as a top pick due to resilient core businesses and strong 2C AI applications [5]. - **Alibaba (BABA)**: Considered the best AI enabler with cloud services as a key growth catalyst [5]. - **PDD**: Valued for its attractive pricing and potential breakeven of Temu in 2026 [5]. - **TME**: Noted for its resilient business model and potential upside from the proposed Ximalaya acquisition [5]. Underweight (UW) / Equal Weight (EW) Recommendations - **JD (UW)**: Facing operational de-leverage and high investments in new businesses [5]. - **BILI (EW)**: Low visibility in gaming and high valuations are concerns [5]. - **Kuaishou (EW)**: Core business performance is lukewarm, with current valuations reflecting this [5]. - **BIDU (EW)**: While Kunlunxin is a near-term catalyst, core business challenges persist [5]. Additional Insights - The report emphasizes the importance of prudent capital expenditure in AI applications to mitigate bubble risks, suggesting a focus on applications that yield better returns on invested capital (ROIC) [2][4]. - The overall industry view remains attractive, with a strong emphasis on the potential for growth in AI and overseas markets despite existing challenges [7]. This summary encapsulates the key points from the conference call, providing a comprehensive overview of the current state and future outlook of the China Internet and AI industry.

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **China Internet** sector, particularly the competitive landscape involving major players like **ByteDance**, **Alibaba**, and **Tencent**. It highlights the strategic pivots expected in 2026 due to advancements in AI technologies and changing market dynamics. Core Insights and Arguments 1. **Strategic Pivot Year**: 2026 is anticipated to be a pivotal year for China internet mega-caps, driven by increased investments in AI technologies and efforts to defend core market positions. ByteDance's advancements in AI and eCommerce are significant factors prompting these changes [1][11][42]. 2. **ByteDance's Market Position**: ByteDance has achieved notable success, being the top in daily token consumption and having the most used consumer-facing app, Doubao, with over 100 million daily active users (DAU). Its Douyin eCommerce GMV is projected to grow over 30% in 2025, positioning it to surpass Pinduoduo in 2026 [11][43]. 3. **AI Investment Themes**: Six key AI themes for 2026 include: - Shift towards ROI-based advertising and new marketing strategies. - Breakthroughs in AI models focusing on multi-modal and cost-efficient architectures. - Proliferation of consumer-facing AI assistants. - Competition for next-generation chips impacting AI model performance. - Expansion into global markets with a mix of open and closed-source models. - Increased demand for AI inference driving cloud revenue growth [2][15]. 4. **Stock Recommendations**: - **Alibaba** and **Tencent** are viewed as strong long-term investments due to their AI capabilities. - **PDD** is highlighted as a key mega-cap idea for 2026, benefiting from a favorable risk-reward profile and strong user engagement [3][16][20]. 5. **Sub-sector Preferences**: The updated preference ranking includes: - **Cloud & Data Centers** (1) - **Games & Entertainment** (2) - **AI Models** (newly added) [21]. Additional Important Insights 1. **Regulatory Environment**: The call discusses the regulatory landscape, indicating that recent investigations into the food delivery sector are not indicative of a return to stringent regulatory measures but rather a push for healthy competition [32]. 2. **Market Valuations**: Current valuations for China internet stocks are noted, with the sector trading at a median 2026E P/E of 18X, which is competitive compared to US peers [13][26]. 3. **Food Delivery Competition**: The competitive landscape in food delivery is expected to normalize, with significant losses narrowing for Alibaba and JD as they adapt to new regulations and market conditions [30][32]. 4. **AI Model Competition**: The competition in AI models is expected to extend towards multi-modal capabilities, with Alibaba positioned as a leader in this space [22][43]. This summary encapsulates the key points discussed in the conference call, providing insights into the strategic direction of the China internet sector and the implications for major players.

Summary of Key Points from the Investor Presentation Industry Overview - **Focus**: The presentation centers on the **Tech and Supply Chain Competitiveness** in the Asia Pacific region, particularly highlighting China's role in various sectors including AI, robotics, and biotechnology [2][5][8]. Economic Development and Growth Targets - **Five-Year Plans**: The evolution of China's Five-Year Plans indicates a shift from quantity to quality in growth targets, with a focus on innovation as a core driver [3][4]. - **GDP Growth**: The projected GDP growth rates are expected to be above 7% for the 2021-2025 period, with a notable increase in the services share in GDP and urbanization rates [3][4]. AI and Technology Investment - **AI Capex Growth**: The top six companies in China are forecasted to increase their AI capital expenditures by **11% YoY**, reaching **Rmb 445 billion** in 2026 [17]. - **GPU Self-Sufficiency**: China's GPU self-sufficiency ratio is expected to reach **50% by 2027**, indicating a significant advancement in domestic technology capabilities [20]. Robotics and Automation - **Global Robotics Market**: China is projected to account for approximately **40% of the global robotics market by 2024**, with growth in drones, service robots, and collaborative robots [30]. - **Humanoid Adoption**: The cumulative adoption of humanoid robots is expected to reach **1 billion globally by 2050**, with around **30%** of these adoptions occurring in China [35]. Biotechnology and Innovation - **FDA Approvals**: By 2040, assets originating from China are expected to constitute **35% of US FDA approvals**, driven by the lifecycle of existing drugs [39]. - **R&D Spending**: There is a significant increase in R&D spending, with a focus on high-value invention patents and core industries of the digital economy [3]. Supply Chain Competitiveness - **Complexity in Exports**: China maintains a unique position with lower complexity in imports but higher complexity in exports, making its supply chain difficult to replicate [46]. - **Lithium Battery Production**: China holds a strong position in lithium battery production, benefiting from a complete value chain and rapid technological advancements [46]. Economic Challenges and Policy Recommendations - **Labor Market Impact**: The introduction of generative AI is expected to create substantial labor-equivalent value, but there may be significant displacement effects in the transition period [55][56]. - **Social Safety Nets**: Recommendations include strengthening social safety nets and providing support for AI-oriented education and career training to mitigate labor market disruptions [57]. Fiscal and Monetary Policy Outlook - **Fiscal Balance**: A gradual rebalancing of fiscal policy is anticipated, with a focus on consumption in 2027 after a supply-centric approach in 2026 [106]. - **Real GDP Growth**: Real GDP growth is expected to ease to **4.8% in 2026** and **4.6% in 2027**, indicating a shift from deflation to low inflation [81]. Consumer Behavior and Housing Market - **Deposit Migration**: There is a notable migration of deposits towards equities, with **Rmb 6-7 trillion** in excess time deposits being targeted for investment [77]. - **Housing Market**: The housing market remains under pressure, with significant inventory levels and a need for social spending rather than bailouts to address the situation [99][100]. Conclusion - The presentation outlines a comprehensive view of China's economic landscape, emphasizing the importance of innovation, technology, and strategic policy adjustments to sustain growth and competitiveness in the global market [1][2][5].

Core Insights - PixVerse, an Alibaba-backed startup, has launched an AI tool for real-time, interactive video creation, allowing users to direct video content as it is generated [1][2] - The company aims to innovate business models by enabling users to influence narratives in micro-dramas or video games without predefined storylines [2] - PixVerse has raised over $60 million in funding, with a significant portion coming from international investors, and is nearing another funding round [3] Company Overview - Founded in 2023, PixVerse has quickly gained traction, surpassing 16 million monthly active users as of October [9] - The company aims to double its workforce to nearly 200 employees by the end of the year and targets 200 million registered users in the first half of the year [10] - PixVerse reported an estimated annual recurring revenue of $40 million in October [12] Industry Context - The AI video generation market is predominantly led by Chinese companies, which offer faster generation speeds and lower costs compared to competitors like OpenAI's Sora 2 Pro [5][7] - Chinese firms are focusing on scalable, low-cost production tools, contrasting with the more simplistic offerings from U.S. products [11] - The competitive landscape includes other players like Kuaishou's Kling, which generated nearly $100 million in revenue in the first three quarters of 2025 [13] Technological Development - PixVerse's tool aims to eliminate waiting times in video creation, reshaping user interaction with AI-generated content [9] - The company prioritizes technology development over immediate commercialization, claiming sufficient funding for a decade of operations [13] - Concerns about the quality of AI-generated content are acknowledged, with comparisons made to the early years of computer graphics, suggesting that quality will improve over time [14]