January 8, 2026 04:26 PM GMT Investor Presentation | Asia Pacific M Foundation China Internet and Other Services – China's AI Path Morgan Stanley Asia Limited+ Gary Yu Equity Analyst Gary.Yu@morganstanley.com +852 2848-6918 Lydia Lin Equity Analyst Lydia.Lin@morganstanley.com +852 2239-1572 China Internet and Other Services Asia Pacific Industry View Attractive Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm ...

19 December 2025 | 3:16PM HKT Equity Research Navigating China Internet: Top AI/apps tracker: Recapping five key themes with agentic AI at the focus; introducing AI Video generation With 2025 drawing to a close, a year marked by the 'DeepSeek moment' at its outset, we tally the key developments/achievements within five themes of China AI developments and what could come for the year ahead. These include: 1) Further breakthroughs in frontier AI model and agentic capabilities, with narrowing performance gaps ...

Summary of Key Points from the Conference Call on China AI Development Industry Overview - The focus is on the **China AI industry**, particularly developments in **Large Language Models (LLMs)**, computing infrastructure, and enterprise/consumer adoption of AI technologies [1][2][3]. Core Insights 1. **Investment Trends**: There is increasing investor interest in China's AI development, with discussions centered around AI investment, application, and domestic substitution, particularly in chips [1]. 2. **LLM Capability**: By 2026, it is expected that China's domestic LLM capabilities will rapidly iterate and catch up with US counterparts [1]. 3. **Monetization Paths**: China and the US are following similar monetization paths for AI, with cloud services and advertising being the most visible areas for growth [1]. 4. **Infrastructure Development**: Continued localization of computing power is anticipated, with improvements in chip performance and supernodes taking on more inference and training workloads [1][2]. Financial Metrics - **CAPEX Comparison**: In Q325, major Chinese cloud providers' CAPEX was 10% of their revenue and 50% of their operating cash flow, compared to 27% and 71% for US hyperscalers. The estimated combined CAPEX of China's internet leaders is around **Rmb400 billion** in 2025, about one-tenth of US peers, while achieving comparable LLM performance [2][24]. AI Disruption Risk 1. **Gradual Disruption**: The pace of AI disruption in China is expected to be gradual due to a fragmented chatbot landscape and high entry barriers in vertical industries [3][27]. 2. **Chatbot Landscape**: Unlike the US, where ChatGPT has a dominant position, China's chatbot apps like Doubao and DeepSeek have not yet consolidated, leading to a more balanced bargaining power between AI apps and vertical platforms [27]. Preferred Stocks - **Investment Recommendations**: The report highlights **Tencent** and **Alibaba** as comprehensive AI leaders, with **Baidu** showing potential upside. Other recommended stocks include **GDS/VNET** in the IDC space and **Meitu/Kuaishou** for AI applications [4]. Strategic Updates from Key Players 1. **Alibaba**: Increasing focus on consumer-facing AI products, with the Qwen app expected to leverage advanced AI models and integrate deeper within Alibaba's ecosystem [12][13]. 2. **ByteDance**: Doubao is expected to broaden its use cases and integrate with broader ecosystems, enhancing its capabilities as a system-level AI assistant [14][15]. Future Catalysts - Anticipated catalysts for the AI sector include continued model iteration, strategic updates from key companies, and capital market updates from domestic chip companies and AI labs [10][11]. Conclusion - The outlook for China's AI industry remains positive, with expectations for accelerated adoption and monetization by 2026. The focus on prudent CAPEX, stable IDC utilization, and gradual disruption risk suggests a robust environment for investment opportunities in the sector [2][3][4].

Summary of Key Points from the Conference Call Industry Overview - The focus is on the **China Internet and AI industry**, particularly the competitive landscape of AI chatbots and their global aspirations. Core Insights and Arguments 1. **AI Adoption and Competition**: The rapid adoption of AI is expected to intensify competition among Chinese AI players in 2026, covering areas from AI cloud infrastructure to chatbots and applications [1][3][5]. 2. **Global Market Penetration**: Chinese Internet and AI companies are increasingly looking to penetrate global markets to export AI technology and explore monetization opportunities, as direct-to-consumer monetization in China is challenging [1][5]. 3. **ByteDance's Position**: ByteDance's AI assistant, Dola, along with Doubao, has achieved a combined total of approximately **250 million MAUs**, ranking it as the **3 AI chat globally** [1][3][11]. 4. **Dola's Growth in Emerging Markets**: Dola has shown significant growth in emerging markets, with MAUs in Indonesia rising from **7.8 million in July 2025 to 17.4 million in November 2025**, and in the Philippines from **9 million to 12.5 million** in the same period [4][30]. 5. **Competitive Landscape in China**: In China, Doubao leads with **197 million MAUs** and **54 million DAUs** as of October, followed by DeepSeek and Tencent's Yuanbao [2][8]. Additional Important Insights 1. **Challenges in Monetization**: Many AI chatbots face difficulties in charging subscription fees directly from consumers, prompting a shift towards global markets for potential revenue [5][49]. 2. **Potential Threats to Local Services**: If Dola becomes a dominant AI gateway in emerging markets, it could challenge the relevance of local e-commerce platforms like Shopee and superapps like Grab [5][49]. 3. **Dola's Compliance Issues**: Dola, which was recently rebranded from Cici, faces compliance challenges due to its need to access local content and understand cultural nuances, opting for widely accepted overseas models like GPT and Gemini instead of Doubao's LLM [48][46]. 4. **Future Monitoring**: Continuous monitoring of both Doubao and Dola is essential to assess their impact on the competitive landscape in China and globally, particularly regarding their potential challenges to major players like Alibaba, Tencent, and Baidu [50]. This summary encapsulates the key points discussed in the conference call, highlighting the competitive dynamics and growth opportunities within the AI chatbot sector, particularly for Chinese companies like ByteDance.

Summary of Key Points from the Conference Call Industry Overview - The China internet sector has shown strong performance in 2025, with a year-to-date return of +36.5%, outperforming Southeast Asia (+18.3%), India (+17.6%), Japan (+16.8%), the US (+16.2%), and Korea (+12.8%) [1][16] - Geopolitical tensions and AI supply-chain issues are expected to keep China's internet companies trading at discounts compared to global peers [1][2] Core Themes and Insights - **AI Competition and Productivity Gains**: The competition among AI players in China is anticipated to intensify in 2026, focusing on AI cloud infrastructure, chatbots, and applications [1][2] - **Monetization Lag**: Monetization of AI technologies is expected to lag behind user traffic growth, particularly when compared to global peers [1][2] - **Top Picks for 1H26**: Recommended stocks include Tencent and Alibaba as core AI plays, Trip.com and NetEase for stable earnings growth, and Century Huatong among A shares [1][2] AI Market Dynamics - **AI Chatbot Penetration**: ChatGPT leads globally with 800 million monthly active users (MAUs), while Bytedance's Dola and Doubao combined rank third with approximately 250 million MAUs [3] - **User Traffic Competition**: Major internet players are competing for user traffic through AI chatbots, which is crucial for future ecosystem monetization [2] Consumer Behavior and Spending - **Leisure and Entertainment Spending**: The adoption of AI tools is expected to enhance consumer productivity, leading to increased spending on leisure and entertainment, particularly in travel and online gaming [4] - **Stable Earnings Growth**: Online travel agencies (OTAs) and gaming companies are projected to benefit from resilient consumer spending [4] Investment Risks - **Geopolitical and Economic Risks**: Risks include geopolitical tensions, AI supply-chain constraints, muted consumer sentiment without stimulus policies, and intensified competition in AI applications [5] - **Profitability Concerns**: The potential for profit lock-in through membership investments and a slowdown in capital returns are highlighted as significant risks [5] Financial Performance Insights - **3Q25 Results**: Among 44 internet companies, 18 reported revenue beats, and 27 reported earnings beats. The guidance for 4Q25 showed mixed results, with some companies exceeding expectations while others fell short [6][10] - **Year-to-Date Share Price Performance**: Alibaba leads with an 86% return, followed by Tencent at 47%. Meituan has underperformed with a -32% return [16][28] Conclusion - The China internet sector is poised for growth driven by AI advancements, but faces challenges from geopolitical risks and competitive pressures. Companies like Tencent and Alibaba are positioned as key players in this evolving landscape, while consumer spending trends indicate resilience in leisure and entertainment sectors.

Summary of Key Points from the Conference Call Industry Overview - The focus is on the **China Internet and AI industry**, particularly the competitive landscape of AI chatbots and their global aspirations. Core Insights and Arguments 1. **AI Adoption and Competition**: The rapid adoption of AI is expected to intensify competition among Chinese AI players in 2026, covering areas from AI cloud infrastructure to chatbots and applications [1][3] 2. **Global Market Penetration**: Chinese Internet and AI companies are increasingly looking to penetrate global markets to export AI technology and explore monetization opportunities, as direct-to-consumer monetization in China is challenging [1][5] 3. **ByteDance's Position**: ByteDance's AI assistant, Dola, along with Doubao, has achieved a combined total of approximately **250 million MAUs**, ranking it as the **3 AI chat globally** [1][3][11] 4. **Dola's Growth in Emerging Markets**: Dola has shown significant growth in emerging markets, with MAUs in Indonesia rising from **7.8 million** in July 2025 to **17.4 million** in November 2025, and in the Philippines from **9 million** to **12.5 million** in the same period [4][31] 5. **Competitive Landscape in China**: In China, Doubao leads with **197 million MAUs** and **54 million DAUs** as of October, followed by DeepSeek and Tencent's Yuanbao [2][8] Additional Important Insights 1. **Challenges in Monetization**: Many AI chatbots face difficulties in charging subscription fees directly from consumers, prompting a shift towards global markets [5][48] 2. **Potential Threats to Local Services**: If Dola becomes a dominant AI gateway in emerging markets, it could challenge the relevance of local e-commerce platforms like Shopee and superapps like Grab [5][48] 3. **Dola's Compliance Issues**: Dola, which was previously known as Cici, faces compliance challenges due to its need to access local content and understand cultural nuances, leading it to utilize widely accepted overseas models like GPT and Gemini instead of Doubao's LLM [47][45] 4. **Future Monitoring**: Continuous monitoring of the progress of Doubao and Dola is essential to assess their impact on the competitive landscape in both China and global markets, particularly regarding their potential challenges to major players like Alibaba, Tencent, and Baidu [49]

Summary of Key Points from the Conference Call on China's Internet Sector Industry Overview - The conference call focused on the **China Internet Sector**, particularly trends in **AI application and monetization** within the industry [2][3]. Core Insights 1. **AI Commercialization Acceleration**: - The call reaffirmed that **cloud services** and **advertising** are the most visible areas for AI monetization. AI chatbots are gradually integrating transactional functions, which could enhance advertising and commerce [2][3]. 2. **Cloud Demand Growth**: - AI adoption has significantly boosted cloud demand in China, especially after the introduction of **DeepSeek**. The demand is primarily driven by model training, deployment, and the rollout of AI applications. Despite LLMs not generating substantial direct revenue yet, Chinese Cloud Service Providers (CSPs) can cross-sell traditional cloud services, potentially leading to robust revenue growth in 2026 [3][4]. 3. **AI Chatbots and Monetization**: - AI chatbots are showing early signs of integrating transactional functions, similar to trends seen internationally. For instance, Bytedance's **Doubao** chatbot is embedding product recommendations in search results, linking users to e-commerce platforms. This trend is expected to accelerate consumer-facing monetization through ads and transactions [4][5]. 4. **Internet Leaders' Strategies**: - **ByteDance**: Rapid revenue growth in its cloud business, with increasing traction in its chatbot offerings. - **Tencent**: AI has become strategically important, enhancing traffic for its chatbot **Yuanbao**. - **Alibaba**: Focused on accelerating cloud revenue, with potential for deeper integration of AI into its commerce ecosystem. - **Baidu**: Developing a full-stack AI footprint, with its AI capabilities improving [5]. Emerging Opportunities - The expert identified several emerging opportunities in AI marketing, AI-hardware integration, and multimodality for advertising and content production, expected to grow into 2026 [2][3]. Risks and Challenges - Key risks to the China internet sector include: - Evolving competitive landscape and intensifying competition - Rapid technological changes and shifting user preferences - Uncertain monetization strategies - Rising costs related to traffic acquisition and content promotion - Regulatory changes [7]. Conclusion - The insights from the call suggest a positive outlook for AI monetization in China's internet sector, particularly through cloud services and advertising, while also highlighting the need for companies to navigate various risks and challenges effectively [2][3][7].

Core Insights - Alibaba Group Holding is redesigning its flagship mobile AI app to resemble OpenAI's ChatGPT, aiming to enhance its competitive position against major Asian rivals [2][4] - The app will be renamed Qwen and will integrate more agent-style capabilities to facilitate shopping across Alibaba's services [3][6] - The long-term goal is to develop Qwen into a fully capable AI agent, with plans for an international version and significant internal resources allocated for the redesign [5][9] E-commerce Integration - Alibaba is leveraging its traditional strength in e-commerce to attract users to the revamped Qwen app, especially as the e-commerce landscape shifts towards AI-driven models [6][7] - The app will initially remain free, with potential for future monetization as the user base grows [7] Payment Infrastructure - Alibaba is overhauling cross-border payment systems within its $35 billion e-commerce ecosystem, focusing on tokenization to enhance global settlement processes [8][9] - A new payment network utilizing a tokenized, stablecoin-like system for international B2B transactions is expected to launch by the end of the year [9] AI Growth and Performance - Alibaba has reported significant growth in AI-related offerings, with its cloud business becoming the fastest-growing division [10]

Summary of Key Points from the Conference Call Industry Overview - The focus is on the China internet sector, particularly mega-cap companies such as Tencent, Alibaba, JD, Meituan, and PDD, as they prepare for their 3Q earnings reports [1][2]. Core Insights and Arguments - **Mixed Earnings Expectations**: Anticipated mixed results for mega-caps in 3Q, with a projected decline in aggregate profits by -31% year-over-year (yoy) for the September quarter, compared to -9% yoy in the June quarter [2]. - **AI and Cloud Revenue Growth**: Expected uplift in capital expenditures (capex) related to AI from Alibaba and Tencent, alongside further acceleration in cloud revenue, driven by strong demand for AI tokens [1][2]. - **Quick Commerce Losses**: Significant losses in quick commerce are expected to continue, with Alibaba, Meituan, and JD projected to incur losses of Rmb-36 billion, Rmb-20 billion, and Rmb-13 billion respectively, widening from previous quarters [2]. - **Investment in New Business Areas**: Mega-caps are expected to invest in new business areas, including AI and international markets, which may impact group margins in the near term [1][2]. - **Consumer-Facing AI Initiatives**: Increased focus on consumer-facing AI initiatives, which may dilute margins in the short term but are seen as essential for long-term growth [1][2]. Company-Specific Insights - **Tencent**: Expected to report solid results with revenue growth of +13% yoy and adjusted EBIT growth of +20% yoy to Rmb73.2 billion. Concerns exist regarding potential margin suppression due to increased AI investments [11][19]. - **Alibaba**: Projected revenue growth of +1% yoy with a significant drop in adjusted EBITA by -80% yoy to Rmb8.2 billion, largely due to investments in quick commerce [11][20]. - **PDD**: Anticipated revenue growth of +16% yoy, with adjusted EBIT declining by -18% yoy to Rmb22.0 billion, driven by steady domestic growth and recovery in Temu's US GMV [11][21]. - **Meituan**: Expected to face a -252% yoy decline in adjusted EBIT, with increased competitive intensity impacting local commerce [11][18]. - **JD**: Projected revenue growth of +11% yoy, but with adjusted EBIT declining by -93% yoy to Rmb0.4 billion, focusing on investment priorities [11][18]. Other Important Insights - **Market Sentiment**: Recent sector pullback attributed to profit-taking on AI themes and concerns over weak profits in 3Q, with upcoming results seen as a potential inflection point for future earnings [2]. - **Valuation Comparisons**: Tencent and Alibaba are viewed as having undemanding valuations compared to global peers, with expectations of continued growth in AI applications and cloud capabilities [10][20]. - **Long-Term Outlook**: Despite short-term losses in quick commerce, there is optimism regarding narrowing losses and improving unit economics in international business segments by 2026 [2][10]. This summary encapsulates the key points discussed in the conference call, highlighting the current state and future outlook of the China internet sector and its major players.

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **China Internet** industry, particularly developments in **AI applications** and **cloud computing** infrastructure. Core Insights and Arguments 1. **Breakthroughs in AI Infrastructure**: - Alibaba Cloud introduced a new GPU pooling system that saves **82%** of GPU resources. - DeepSeek's OCR model reduces token consumption by **90%** by compressing long text into visual tokens. - The Chinese Academy of Sciences developed the SpikingBrain AI model, achieving competitive performance with **100X** faster speed and using only **2%** of the pre-training data compared to traditional models [2][8][11]. 2. **Proliferation of AI Token Consumption**: - Bytedance's daily token usage surpassed **30 trillion** in September 2025, doubling from **16 trillion** in May 2025. - Alibaba noted that token consumption is doubling every **2-3 months** [2][8][11]. 3. **Global Market Positioning**: - Chinese multi-modal AI models, such as Tencent's Hunyuan Image 3.0, are gaining global recognition, outperforming competitors like Google's Nano Banana. - Tencent launched Hunyuan World 1.1, enhancing its multi-modal offerings [2][8][11]. 4. **Commercialization of AI Applications**: - Chinese applications are following the commercialization path set by ChatGPT, with Doubao integrating eCommerce functionalities. - Alibaba's Quark launched the Zaodian app, which has seen significant growth in multi-modal video/image-editing functions [2][10][11]. 5. **Capex Outlook for Hyperscalers**: - There is an expected upside to capex targets for Chinese hyperscalers, with Alibaba's FY26-28E capex forecast at **Rmb460 billion**, higher than the company's target of **Rmb380 billion** [3][7][11]. 6. **Valuation Insights**: - Analysts believe that Tencent and Alibaba are trading at undemanding valuations compared to global peers, with expected EPS growth rates of **17%** and **30%** for CY26, respectively [7][11]. Additional Important Insights 1. **AI Engagement Trends**: - Domestic AIGC application engagement saw a **1%** month-over-month decline, driven by decreases in Maoxiang and Xingye, while Doubao and DeepSeek experienced growth [13][68]. 2. **E-commerce and Social Engagement**: - E-commerce engagement grew by **12%** year-over-year, with JD and Taobao showing strong growth rates of **46%** and **14%**, respectively [12][13]. 3. **Chip Supply Dynamics**: - Huawei announced a three-year plan for its Ascend chip series, aiming for a one-year release cycle and doubling computational power with each new release [10][11]. 4. **AI Monetization Progress**: - The annual recurring revenue (ARR) of various AI operations in Chinese companies shows ByteDance leading with **$116 million**, followed by Alibaba with **$85 million** [43]. 5. **Market Share and Revenue Growth**: - Alibaba Cloud is projected to have a **33%** revenue growth rate for FY26, while Tencent's cloud services are expected to grow by **30%** [66]. This summary encapsulates the key developments and insights from the conference call, highlighting the advancements in AI technology, market dynamics, and the competitive landscape within the China Internet sector.