China Internet Sector_What to buy in the AI driven rally_

Summary of the China Internet Sector Conference Call Industry Overview - The conference call focused on the China Internet Sector, particularly in the context of the recent AI-driven market rally and its implications for various companies within the sector [2][10]. Key Points and Arguments 1. Market Performance and Valuation: - The KWEB index increased by 7% since January 28, 2025, driven by the launch of DeepSeek's free chatbot app, indicating a positive market sentiment towards AI in China [2][10]. - The sector is currently trading at an average P/E ratio of 14x with an expected 15% EPS growth from 2024 to 2026, suggesting that valuations remain attractive relative to growth potential [2][10]. 2. Government Stimulus and AI Productivity: - There is potential for macroeconomic stimulus from the government, which is not yet reflected in current valuations. The anticipated benefits from AI productivity improvements could further enhance earnings [2][10]. 3. Earnings Growth and Structural Opportunities: - Internet companies in China are expected to benefit from structural growth opportunities due to advancements in technology and efficiency improvements, moving beyond purely cyclical growth [2][10]. 4. Foreign Investment Trends: - Foreign investors are currently underweight in the China Internet sector, primarily focusing on major AI beneficiaries like Alibaba (BABA) without fully considering the fundamentals of other companies [2][10]. 5. Positive Q4 Earnings Expectations: - The upcoming Q4 earnings season is expected to be generally positive, with major internet companies tracking slightly ahead of expectations [2][10]. Company-Specific Insights 1. DeepSeek's Impact: - DeepSeek's launch has demonstrated China's capability to innovate in tech despite hardware limitations. It has led to operational enhancements across various companies, such as: - Tencent's ad tech upgrade, which is projected to increase ad revenue by 18% in 2024 despite a challenging macro environment [3][10]. - Alibaba's marketing tools that lower barriers for merchants and Kuaishou's AI initiatives contributing to daily ad revenue of approximately RMB 30 million [3][10]. 2. Capex Re-evaluation: - Companies may revisit their capital expenditure plans due to more efficient training methods, potentially altering the mix between training and inference chips [3][10]. 3. Stock Recommendations: - JD.com is highlighted as a company with low valuation (8x 2025E P/E) and several catalysts ahead, including strong Q4 results and revenue acceleration into 2025 [4][10]. - Tencent is noted as an underappreciated AI beneficiary, with strong game revenue and AI monetization potential [4][10]. - NetEase is recognized for its strong game performance and potential for earnings upgrades [4][10]. Performance Recap - A recap of stock performance from January 28 to February 13, 2025, shows: - Tencent Holdings: 10% increase - Alibaba Group: 23% increase - JD.com: -4% decrease [7][10]. Risks and Challenges - Key risks identified for the sector include: - Evolving competitive landscape and intensifying competition - Fast-moving technology trends and changing user preferences - Uncertain monetization and rising costs of traffic acquisition [12][14][15][16]. Conclusion - The China Internet sector is poised for growth driven by AI advancements and potential government support, with specific companies like JD.com, Tencent, and NetEase positioned favorably for future performance. However, investors should remain cautious of the competitive landscape and regulatory changes that could impact profitability and growth trajectories [2][10][12].