Global Markets Strategy 23 December 2025 This material is neither intended to be distributed to Mainland China investors nor to provide securities investment consultancy services within the territory of Mainland China. This material or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. China Equity Strategy 100%/88% of CSI300/MXCN have reported 3Q25: highlights on internet platforms and AI Equity Macro Research Wendy Liu AC (852) 2800-1087 wendy.m.liu@ ...

Core Insights - The memory chip sector, particularly companies like Micron, is expected to maintain momentum into 2026 due to strong demand and reduced capacity in other areas of the market [1][2][3] - The rally in stocks such as Centex, Seagate, and Western Digital is attributed to the undervalued nature of these "boring" segments, which are anticipated to attract investor interest [3] - The AI sector is facing challenges, with companies like Adobe and ServiceNow struggling to monetize AI tools effectively, leading to increased competition and pressure on margins [4][6][7] Memory Chip Market - Strong demand for memory chips has led manufacturers to focus on this segment, reducing capacity for other products [2] - The expectation is that the memory chip market will continue to be a focal point for investors in 2026, benefiting from higher productivity and cost efficiency [3] AI Sector Challenges - Despite the potential of AI applications, companies in this space are experiencing difficulties in monetization, with increased competition impacting their performance [6][7] - The pressure on software companies to deliver returns on AI investments is significant, with some unable to adapt to market changes [5][6] Capital Expenditure Trends - There is a growing investor demand for clarity on return on investment (ROI) related to capital expenditures, particularly in technology [9][10] - Companies are advised to manage spending carefully to avoid overspending that could lead to obsolescence before revenues materialize [10][11] Investment Strategy - A rotation from technology to non-technology sectors is anticipated, with a focus on companies that can leverage AI tools effectively [12][13] - The macroeconomic environment remains supportive for technology stocks, but a shift in enthusiasm towards sectors benefiting from technology integration is expected [13]

Group 1 - ByteDance plans to increase its capital expenditure on AI to $23 billion (RMB 160 billion) in 2026, up from RMB 150 billion in 2025 [1] - More than half of the 2026 expenditure will be allocated to acquiring advanced semiconductors for AI model and application development [1] - A deal involving Oracle, Silver Lake, and MGX will result in them collectively owning 45% of a U.S. entity, with ByteDance retaining nearly 20% [1] Group 2 - Publicly traded companies in the social media sector include Meta Platforms, Pinterest, Reddit, and Snap [1]

Core Viewpoint - C3.ai is experiencing a slight recovery in its stock price after a challenging year, primarily due to its transition from a subscription model to a consumption-based pricing model, which is expected to enhance growth in the long term [1][5][6]. Group 1: Stock Performance and Predictions - C3.ai shares have shown modest improvement over the past month, although they remain significantly down for the year [1]. - An AI price-prediction model forecasts a modest upward trend for C3.ai over the next 60 days, with a potential price of $65 by 2030 [2][3]. - The average predicted price for C3.ai is $21.92, indicating an implied move of approximately 51% higher over the next month [8]. Group 2: Business Model Transition - The company's shift to a consumption-based pricing model aims to lower entry barriers for enterprise customers, allowing them to test AI applications before committing to larger contracts [5]. - This transition has led to a temporary decline in revenue and investor confidence, but management believes it will result in more sustainable and recurring growth in the future [6]. Group 3: Federal Business Resilience - C3.ai has demonstrated resilience in its federal business, particularly with contracts from the U.S. government and defense sector, which are less affected by economic fluctuations [7].

Server racks inside fragile, cracked bubbles, symbolizing a tech-bubble risk. Key Points Valuations in the AI sector remain high, but historical patterns suggest a bubble is unlikely to burst while caution prevails. Black Hills Corp. is positioned to benefit from AI-related energy demands through its utility footprint in rural data center boomtowns. Nutrien offers a defensive AI hedge, with stable demand driven by global agriculture and minimal AI sector exposure. Interested in Black Hills Corporation ...

Core Insights - The data center market has seen over $61 billion in investment this year, a slight increase from $60.8 billion last year, amidst a "global construction frenzy" [1] - Dealmaking in global data centers has reached a record high, driven by the need for infrastructure to support energy-intensive AI workloads, with a notable increase in debt financing from private equity markets [2] - Concerns about inflated AI valuations and the sustainability of data center financing have emerged, leading to a sell-off in global stocks [1][2] Company-Specific Developments - Oracle's shares dropped 5% following reports of Blue Owl Capital withdrawing from a $10 billion data center deal in Michigan, impacting other tech stocks like Broadcom, Nvidia, and AMD [3] - Despite the recent stock pullback, analysts, including those from S&P Global, expect that market concerns regarding AI and Oracle will be temporary and will not significantly affect data center development and M&A activities in the near term [4] Market Trends - There have been over 100 data center transactions in the first 11 months of the year, surpassing the total deal value for all of 2024, with the majority occurring in the U.S. and the Asia-Pacific region [6] - The competitive landscape among AI model providers is rapidly changing, which may influence investor sentiment in public markets, but demand for AI applications is projected to continue growing strongly through 2026 [4]

Core Viewpoint - The AI market is still in its early growth stages and is not a bubble, with expectations for continued tech bull market for another two years [1][2]. Company Insights - Alphabet Inc. has seen significant benefits from AI developments, with Class A shares up 70.74% and Class C shares up 69.77% year-to-date [4]. - Apple Inc.'s partnership with Google is considered crucial for its AI strategy, particularly through the Gemini partnership [5]. - Microsoft Corp is highlighted as a top pick due to its strong position in cloud and enterprise AI services, with Q1 revenue rising 18% year-over-year to $77.7 billion, and cloud revenue reaching $49.1 billion, up 26% year-over-year [6][7]. - Palantir Technologies is noted for its real-world AI applications, despite valuation concerns [7]. Industry Developments - The US government has initiated the Genesis Mission, a program aimed at unifying federal data and advanced AI to accelerate breakthroughs in various sectors including medicine, defense, and energy [8].

Summary of China Software 3Q25 Result Review Industry Overview - The report focuses on the **China Software** industry, specifically analyzing the performance of various software companies in the third quarter of 2025 (3Q25) and updating estimates based on recent trends. Key Points Overall Performance - Average revenue growth for the covered companies was **4% YoY** in 3Q25, a decline from **9% in 1H25** [1] - Average net margin improved to **3% in 3Q25**, compared to **-3% in 1H25**, indicating enhanced efficiency and profitability among software companies [1] Company-Specific Highlights - **Kingsoft Office**, **Thundersoft**, and **Arcsoft** showed strong revenue growth driven by increased demand for AI products, despite overall soft IT spending [1] - **iFlytek**, **Sangfor**, and **Glodon** experienced net income recovery in 3Q25 due to productivity improvements [1] Management Insights - Management teams expressed optimism regarding enterprise and government spending on AI applications, AI agents, and AI models to enhance productivity and creativity [1] - Despite positive sentiments, the report maintains a **Sell rating** on **ZWSOFT**, **Glodon**, **Thundersoft**, and **Sangfor**, primarily due to valuation concerns [1] Valuation Metrics - The average P/E ratio for China software companies is around **55x-60x**, compared to a five-year average of **59x** [2] - The average EV/Sales ratio remains at **8x-9x**, lower than the 2020-21 average of **12x-18x** [2] Individual Company Performance - **Glodon**: Revenue increased by **4% YoY** to **Rmb1.5 billion**, driven by construction management and design software growth. However, the company faces weak momentum in new construction projects [11] - **ZWSOFT**: Revenue remained flat YoY at **Rmb204 million**, attributed to weak end demand in the China market. Management expects slight recovery in 4Q25 [22] - **Thundersoft**: Revenue grew **43% YoY** to **Rmb1.848 billion**, driven by IoT software and automotive software growth. The company is focusing on next-generation automotive OS and AI edge solutions [30] - **Sangfor**: Revenue growth of **10% YoY** to **Rmb2.116 billion**, attributed to strong demand for cloud computing solutions. The company launched new AI platforms to enhance efficiency [37] Earnings Revisions - **Glodon**: Net income estimates revised down by **6%** for 2025-28E due to lower construction-cost software revenues and higher operating expenses [16] - **ZWSOFT**: Net income estimates revised down by **18%** for 2025-27E due to lower revenues and gross margins [26] - **Thundersoft**: Earnings revised down by **15%** for 2025-27E, mainly due to lower revenue in smartphone software [33] - **Sangfor**: Earnings revised up by **1%** for 2025-27E, reflecting better-than-expected cost management [40] Future Outlook - Management of **Glodon** expects the new code of bills in the construction market to support revenue growth, while **ZWSOFT** anticipates recovery driven by overseas business growth and new client penetration [20][22] - **Thundersoft** is optimistic about opportunities from AI edge devices and the next generation of automotive OS [30] Conclusion - The China Software industry is experiencing mixed performance, with some companies benefiting from AI-related demand while others face challenges. Valuation concerns persist, leading to cautious outlooks for several firms despite positive management sentiments regarding future growth opportunities.

Baidu, Inc. (NASDAQ:BIDU) is one of the  AI Stocks Making Moves on Wall Street. On November 19, Benchmark analyst Fawne Jiang raised the firm’s price target on the stock to $158 from $115 and kept a “Buy” rating on the shares. The firm believes that strong AI momentum is helping Baidu offset a weak ad recovery. The firm noted how Baidu’s Q3 results show diverging trends. Its main search ad business is weak, and it remains unclear when it will recover considering that the company is testing more AI feature ...

Core Viewpoint - The current rebound in big tech stocks is influenced by long-term AI success rather than short-term government issues, presenting potential buying opportunities [2][4]. Group 1: Market Dynamics - The volatility in the market is expected to continue, with a fundamental risk being the potential drying up of funding if risk aversion increases [4]. - Companies with strong balance sheets and diversified businesses, such as Meta, Microsoft, and Alphabet, are well-positioned to weather short-term issues [5][6]. Group 2: Sector Preferences - Healthcare is highlighted as a preferred sector, particularly managed care names that may be undervalued due to ACA subsidy concerns [7]. - Big pharma stocks are also favored, with specific mention of Pfizer and the GLP-1 agreements indicating that regulatory rhetoric may be overstated [8]. Group 3: Investment Picks - Major holdings include Microsoft and Alphabet, with Alphabet noted for its unique position in the AI ecosystem, leveraging its own TPU chips and proprietary data [9][10]. - Alphabet's regulatory challenges appear to be diminishing, enhancing its attractiveness as an AI investment [11].