Investment Rating - The industry rating is "Outperform the Market" [6][13]. Core Insights - The domestic AI application sector is poised for explosive growth, with major companies actively investing in AI models and talent [2][6]. - Competition in AI model development and application commercialization is intensifying, with significant advancements in both super entry points and vertical functionalities [2][6]. Summary by Sections Industry Dynamics - Tencent has launched the Tencent HY 2.0 language model, significantly improving performance in complex reasoning scenarios, and has released the HY-World 1.5 model for real-time 3D reconstruction [3]. - Alibaba has open-sourced the Qwen-Image-Edit-2511 model, enhancing character consistency and industrial design adaptability, and upgraded the Qwen3-TTS voice model for comprehensive audio understanding [4]. - ByteDance has released the Doubao model 1.8, enhancing autonomous planning and cross-system collaboration, and introduced the Seedance 1.5 Pro model for audio-visual synchronization [4]. - MiniMax has updated its M2 series model, achieving an average score of 88.6 on the VIBE comprehensive ranking, surpassing several international models in multilingual programming capabilities [4]. - Zhipu AI has launched the GLM-4.7 model, focusing on programming, reasoning, and intelligent agents, supporting 128K long texts and multimodal interactions [4]. Application Commercialization - Tencent's Yuanbao APP has added a novel writing feature and integrated with QQ groups for intelligent message summarization [5]. - Alibaba's Qianwen APP surpassed 40 million monthly active users within 30 days of public testing, integrating local life services and launching an AI drama generation feature [5]. - ByteDance's Doubao series models have achieved a daily usage of over 50 trillion tokens, ranking first in China and third globally, with the Doubao APP's daily active users exceeding 100 million [5]. - MiniMax has collaborated with Kuaikan Manhua to launch the first AI interactive comic, enabling animated and voice-enabled characters [5]. - Zhipu AI has fully integrated the GLM-4.7 model capabilities into its applications, enhancing coding abilities and task planning [5]. Investment Recommendations - The report expresses optimism about the explosive growth potential in the domestic AI application sector, recommending attention to Tencent, Alibaba, MiniMax (upcoming IPO), and Zhipu (upcoming IPO) [6].

Core Viewpoint - Tencent reported strong Q2 2025 earnings with revenue of 184.5 billion yuan, a 15% year-on-year increase, and a net profit of 55.6 billion yuan, up 17% [1] Revenue Growth by Segment - Value-added services revenue reached 91.4 billion yuan, growing 16% year-on-year; international game revenue was 18.8 billion yuan, up 35%; domestic game revenue was 40.4 billion yuan, increasing 17%; social network revenue was 32.2 billion yuan, growing 6%; marketing services revenue was 35.8 billion yuan, up 20%; and financial technology and enterprise services revenue was 55.5 billion yuan, increasing 10% [1] Drivers of Business Growth - Key drivers for the quarter's growth included rapid international game revenue growth (35%), better-than-expected advertising revenue, and domestic game revenue, primarily driven by underlying AI advancements [2] AI Strategy Indicators - Tencent tracks AI development progress through four key performance indicators (KPIs): 1. AI's impact on existing business efficiency and revenue growth [3] 2. Performance and quality of the mixed Yuan model [4] 3. Growth of AI apps, including user numbers and AI-driven search metrics [5] 4. Progress in designing AI innovation products within Tencent's ecosystem [6] AI Empowerment Strategy - Tencent's AI strategy focuses on enhancing existing revenue streams (advertising, gaming, financial technology) rather than creating new systems, contrasting with approaches taken by companies like Meta and Google [9] User Engagement and Retention - The company emphasizes the importance of user engagement and retention for its AI applications, aiming to increase user stickiness to avoid losing customers to competitors [11][14] Development of Phenomenal Products - Tencent aims to develop standout AI products, such as AI agents integrated into WeChat and productivity tools, recognizing that success requires both technological advancement and external opportunities [15][16] Strategic Progression - Tencent's strategy reflects a progression: first ensuring profitability, then expanding user base, and finally cultivating standout products, adhering to a principle of steady progress [17][18]

Core Insights - Nvidia's plan to resume supply of H20 chips to China is seen as a market focus, but Morgan Stanley's analysis suggests it is not a game changer for the AI sector [1] - Alibaba's "shovel seller" model is expected to generate quicker financial returns for shareholders compared to Tencent's strategy, which may face short-term challenges [1][6] - Capital expenditure (Capex) is a key indicator of cloud vendors' commitment to AI investments, with predictions of a slowdown in growth in 2025 after a peak in 2024 [4][6] Company Strategies - Alibaba's strategy focuses on external sales of computing power, which is expected to yield higher returns on AI investments compared to Tencent's internal application development approach [1][6] - Tencent's AI ecosystem strategy is seen as beneficial in the long term, but the current free provision of AI features is negatively impacting short-term profitability due to high operational costs [3][6] Financial Projections - Morgan Stanley predicts that the overall capital expenditure growth in the industry will slow down in 2025, while Goldman Sachs expects a recovery in capital spending for Alibaba and Tencent in the second half of 2025 [4][5] - Alibaba's capital expenditure is projected to reach 109 billion RMB in the fiscal year ending March 2026, a 25% increase year-on-year, while Tencent's is expected to be 94 billion RMB, a 22% increase [6] Market Demand - The demand for AI computing power is characterized as "moderate growth" rather than "exponential," particularly among external public cloud customers [5][6] - The recovery of chip supply is not anticipated to lead to a significant increase in cloud vendors' revenues, as many leading companies are using their own GPUs rather than renting from public clouds [5][6]