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 ...

Core Viewpoint - NetDragon Websoft Holdings Limited has entered into a strategic partnership with Volcengine to enhance the development of AI-generated educational resources and create a shared innovative education ecosystem [1][2]. Group 1: Partnership Details - The partnership will focus on four key areas: joint technological innovation, ecosystem resource co-creation, commercial application empowerment, and industry engagement [2]. - Volcengine will assist NetDragon in developing education-focused large language models for various applications, including teaching and content creation [2]. - Both companies will invest in computing power, algorithms, and data to develop high-quality AIGC educational resources, aiming to build an open and intelligent education content ecosystem [2]. Group 2: AI Strategy and Implementation - NetDragon has adopted a "Fully Embracing AI" strategy, establishing an "AI Content Factory" to efficiently generate AIGC content across education, entertainment, and culture [3]. - The AI Content Factory utilizes a core architecture of fragmented nodes and expert systems to create stable AIGC education content production capabilities [3]. - The company plans to expand its commercialization efforts domestically and integrate with the Open-Q ecosystem for global growth [3]. Group 3: Sector-Specific Developments - In the entertainment sector, NetDragon is focusing on AI-driven content production for its flagship IPs, which is expected to enhance profitability and create new revenue opportunities [4]. - The cultural sector investments include AIGC-driven animation series and AI/VR performances, with ongoing identification of high-potential opportunities [4]. - NetDragon aims to leverage AI computing power and vertical AIGC models to expand its enterprise ecosystem's capabilities and long-term value [4]. Group 4: Additional Collaborations - NetDragon has also partnered with Epic Games, becoming an ecosystem partner and establishing a training center for Unreal Engine in China [6]. - The collaboration with Epic Games aims to enhance the visual quality and performance of AIGC educational content [6][7]. Group 5: Company Background - NetDragon is a well-established online game developer in China, with a history of successful titles and a growing EdTech business [8]. - The company is committed to building a massive user community in the AI era through its dual-focus strategy of "AI+Gaming" and "AI+Education" [8][9].

Core Viewpoint - China's hotel industry is experiencing a paradox where record numbers of travelers are leading to declining room rates, largely attributed to the discounting practices of Trip.com Group Ltd [1][4]. Group 1: Impact of Trip.com on Hotel Operators - Hotel operators, such as those in Zhejiang province, report that nightly rates have fallen to levels not seen in over a decade due to Trip.com's frequent discount campaigns [2][3]. - Operators are compelled to cut prices by at least 15% to maintain visibility on Trip.com, which has become essential for connecting travelers with small operators [3][4]. - The dominance of Trip.com, which controls approximately 56% of China's online travel market, has contributed to a recovery in domestic tourism, with nearly 5 billion trips recorded in the first three quarters of 2025 [6]. Group 2: Regulatory Concerns and Market Dynamics - The Chinese government is investigating Trip.com for alleged antitrust violations, focusing on its market position and the deflationary effects on the hotel sector [4][5]. - Revenue per room in China remained flat in 2025, contrasting with gains in other Asian markets, indicating a stagnation in profitability despite increased demand [5]. - The hotel industry faces challenges such as oversupply and cautious consumer spending, leading to significant losses as hotels reduce rates to fill vacancies [7]. Group 3: Exclusive Arrangements and Market Practices - Trip.com's "er xuan yi" exclusivity arrangements limit competition by preventing top-tier merchants from listing on rival platforms, which has drawn regulatory scrutiny [8][9]. - Merchants not bound by these exclusivity agreements report being pressured to offer the lowest prices on Trip.com's platform to avoid penalties like reduced search rankings [9].

Core Insights - The global ecommerce market is projected to grow at a compound annual growth rate (CAGR) of 6.2%, reaching approximately US$9.21 trillion by 2029, up from an estimated US$7.25 trillion in 2025 [3][13]. Market Growth and Trends - The ecommerce market has experienced a robust growth rate of 9.5% from 2020 to 2024, with expectations of continued growth at a CAGR of 6.2% from 2025 to 2029 [3]. - Digital payments are becoming more localized, with countries like India and Brazil seeing rapid adoption of local payment methods integrated into ecommerce platforms [4]. - Social commerce is reshaping online purchasing pathways, with platforms like Douyin and TikTok Shop driving engagement and sales through content [5][9]. Competitive Landscape - Competitive intensity is expected to increase as cross-border discount platforms scale globally and social-commerce ecosystems deepen their integration with traditional commerce [2]. - Major players such as Amazon, Alibaba, Walmart, JD.com, and Mercado Libre are scaling logistics networks and financial services as key differentiators [11]. - New entrants like Temu are expanding their presence in the U.S. and Europe, intensifying competition in the ecommerce space [11]. Cross-Border Commerce - Cross-border ecommerce is gaining momentum as consumers seek imports and price advantages, with platforms like Temu and Shein attracting customers through competitively priced international goods [6][9]. - Improved international logistics and favorable government trade policies are facilitating cross-border flows, although regulatory scrutiny may impact certain models [9][10]. Omni-Channel Integration - Retailers are increasingly integrating ecommerce with physical store formats to enhance fulfillment and inventory management, leveraging existing store networks for improved last-mile efficiency [7][10]. - The trend towards omni-channel retail integration is expected to strengthen as retailers seek margin stability and adapt to consumer expectations for flexible delivery options [7][10]. Recent Developments - Strategic partnerships and mergers have been prominent, such as Shopify and TikTok's collaboration for cross-border merchant onboarding and Amazon's investment in Deliveroo for grocery fulfillment [12].

Core Insights - ByteDance's valuation has surged to US$500 billion in the private market, up from US$400 billion earlier this year, as it advances a survival plan in the US [1][3] - TikTok CEO Chew Shou Zi announced a binding agreement to divest its US entity into a joint venture controlled by American investors [1][6] - Investors are pleased with the deal, allowing ByteDance to continue earning from TikTok in the US [2] Valuation and Market Context - The US$500 billion valuation marks a record for ByteDance, which previously approached US$400 billion in April 2021 [3] - The valuation had dropped to US$400 billion in Q2 of this year as the company worked on the US deal and progressed in AI [4] - A Chinese investment firm recently bought ByteDance shares at a valuation of US$480 billion, indicating strong investor interest [4] Political and Regulatory Environment - ByteDance's valuation has followed a V-shaped trajectory amid political challenges in the US and Europe, with both Trump and Biden targeting TikTok over national security concerns [5] - A new law requires divestment by January 23, 2026, prompting ByteDance to form a new US joint venture [5][6] Joint Venture Structure - The new joint venture, TikTok USDS Joint Venture, will be established a day before the divestment deadline [6] - A consortium of American and allied investors, including Oracle, Silver Lake, and Abu Dhabi-based MGX, will hold 50% of the entity, with each owning 15% [6] - Affiliates of existing ByteDance investors will hold 30.1%, while ByteDance will retain 19.9% [6]

Core Insights - ByteDance Ltd. is projected to achieve profits of approximately $50 billion by 2025, marking a record year for the company as it expands into e-commerce and new markets [1][11] - The company has already reported a net income of about $40 billion in the first three quarters of the year, surpassing its internal target for 2025 [2] Financial Performance - ByteDance's earnings are expected to approach those of US competitor Meta Platforms Inc., which is estimated to earn around $60 billion this year [2][12] - The company aims for a 20% increase in sales by 2025, targeting total revenue of $186 billion [6] - ByteDance's revenue growth has been robust, with the company experiencing over 20% growth in previous years [7] Market Position and Expansion - TikTok has rapidly expanded globally, including significant growth in the US market, despite scrutiny from the Biden administration regarding national security [5][12] - The platform is aggressively entering the e-commerce space, partnering with major tech companies like Amazon [5] Valuation and Investor Interest - ByteDance's valuation has seen significant increases, with estimates ranging from $400 billion to $480 billion, reflecting strong investor interest [9] - The company claims over 4 billion monthly active users across its apps, comparable to Meta's user base [8] Challenges and Future Outlook - Despite strong growth, ByteDance may face slower growth rates moving forward, particularly as its main revenue driver, Douyin, deals with declining consumption and advertising spending in China [10]

Summary of the Conference Call on China's E-commerce Industry Industry Overview - The conference call discusses the e-commerce sector in China, particularly focusing on the Singles' Day shopping festival and its implications for online retail growth and consumer behavior. Key Highlights from Singles' Day Festival 1. **GMV Growth and Parcel Volume**: - Estimated gross merchandise value (GMV) growth of approximately 10% during the Singles' Day festival period from November 1 to November 11, with parcel volume growth of about 9% year-over-year (yoy) [2][8][36]. - The growth rate for parcel volume has moderated compared to the previous year, which saw a 21% increase [2]. 2. **Impact of National Subsidies**: - The fourth batch of national subsidies, totaling RMB 69 billion, was rolled out on October 1, contributing to the overall GMV growth [8][13]. - The subsidies are expected to have a diminishing impact in 4Q25 due to a high base effect from the previous year [13]. 3. **Performance of Major E-commerce Players**: - Alibaba (BABA) reported an 8% growth in GMV, while JD.com (JD) saw a 7% increase in GMV and a 40% increase in active buyers [16]. - Pinduoduo (PDD) emphasized its everyday low price strategy, achieving a 12% GMV growth during the festival [16]. 4. **Shift to Online Services**: - Online services GMV grew by 27% in October, indicating a shift in consumer spending towards services rather than goods [1]. 5. **AI Integration in E-commerce**: - Significant adoption of AI tools by major platforms, with Alibaba rolling out six AI tools that improved click-through rates (CTR) by 10% and merchant return on investment (ROI) by 12% [10]. Additional Insights - **Consumer Behavior Trends**: - There is a noted decline in home appliance sales, down 15% yoy, while communication devices saw a robust growth of 23% yoy [1][54]. - The overall retail sales growth was 2.9% yoy in October, aligning with expectations [1]. - **Quick Commerce Growth**: - Quick commerce GMV increased by 138.4% yoy, with platforms like Meituan and JD seeing substantial growth in their respective categories [12]. - **Market Competition**: - The competition in the quick commerce sector is intensifying, with expectations of a fragmented long-term landscape as companies focus on improving unit economics [12]. - **Sustainability of Growth**: - Concerns regarding the sustainability of national trade-in subsidies and their impact on appliance sales moving forward [13]. Conclusion - The e-commerce sector in China is experiencing a normalization in growth rates post-Singles' Day, with significant shifts towards online services and AI integration. The competitive landscape remains dynamic, with major players adapting their strategies to maintain market share amidst changing consumer preferences and regulatory pressures.

Core Insights - Alibaba and Baidu are leading players in China's tech sector, with Alibaba focusing on e-commerce and cloud services, while Baidu specializes in online search and video streaming [1][2] Company Overview - Alibaba's revenue primarily comes from its online marketplaces, Taobao and Tmall, with a smaller portion from its cloud business, which has lower margins [3] - Baidu generates most of its revenue from online advertising, including search and video ads, with a growing but still minor contribution from its AI Cloud platform [7] Market Challenges - Alibaba faces regulatory challenges and competition from smaller e-commerce rivals due to antitrust regulations that limit its business practices [4] - Baidu is under pressure from competitors like Tencent's WeChat and ByteDance's Douyin, which are attracting younger users and diversifying their services [8] Growth Prospects - Analysts project Alibaba's revenue and earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 8% and 12%, respectively, from fiscal 2025 to fiscal 2028, driven by AI enhancements and logistics improvements [11] - In contrast, Baidu's revenue is expected to grow at a CAGR of only 3% from 2024 to 2027, with EPS projected to decline at a negative CAGR of 5% due to unprofitable service expansions [13] Investment Outlook - Alibaba is viewed as a better investment opportunity compared to Baidu, as its strategy appears more sustainable despite both companies sacrificing near-term margins for long-term growth [14][15] - Alibaba's valuation is considered reasonable at 20 times next year's earnings, while Baidu's stock does not seem like a bargain at 19 times next year's earnings [12][13]

Investment Opportunity - rTTOK allows investment in ByteDance's performance, the parent company of TikTok, CapCut, and Douyin [1] - Investment starts from as little as $250 [1] Platform & Partnership - rTTOK is available on Republic [1] - The project is in partnership with CoinList and built on Solana [1]

Core Insights - Alibaba Group's aggressive AI strategy is increasingly viewed as a costly gamble that may erode shareholder value rather than enhance it [1] - The company is perceived as a classic value trap, where its superficial attractiveness conceals deeper structural issues [2] - Despite management's optimism regarding AI, the underlying business fundamentals indicate a deteriorating model under competitive pressure [3] Financial Performance - Margin compression is accelerating, with Mizuho forecasting significant margin contraction in Q2 2025, leading to an 18% reduction in EBITDA forecast from 55 billion RMB to 45 billion RMB [4] - Free cash flow has decreased by 76%, dropping to RMB3,743 million from RMB15,361 million in the same quarter of 2024, primarily due to increased cloud infrastructure spending [5] - The cloud business, despite reporting triple-digit AI product revenue growth, requires substantial ongoing investment, indicating a fundamentally flawed business model [6] Competitive Landscape - Alibaba is facing intense competition in both e-commerce and cloud markets, with rivals like PDD Holdings and ByteDance's Douyin exerting pressure [7] - Douyin reported a 46% year-over-year growth in gross merchandise volume (GMV), while Alibaba's growth was only 5%, highlighting significant market share erosion [9][12] - The emergence of social commerce and live-streaming sales channels poses an existential threat to Alibaba's traditional marketplace model [11] Regulatory Environment and Earnings Outlook - The regulatory landscape is worsening, with new e-commerce rules pressuring Alibaba's margins by requiring reduced merchant fees [13] - The Zacks Consensus Estimate predicts a 4.77% year-over-year decline in fiscal 2026 earnings to $8.58 per share, reflecting operational inefficiencies [13] - Current earnings estimates for the upcoming quarters remain unchanged, indicating a lack of positive momentum [14] Strategic Considerations - The company's pivot towards AI demands significant patience and capital, which may not be justifiable given the competitive alternatives in the technology and e-commerce sectors [16] - Investors are advised to seek growth opportunities elsewhere, as the risk-reward profile for Alibaba appears unfavorable [18]