By 2026, China's internet sector is projected to concentrate on three major themes: recurring revenue growth from cloud infrastructure, model stacks, and inference token usage; a race among major internet players to capture user traffic for AI chatbots, aiming for future ecosystem monetization; and vertical enterprises deploying self-trained AI agents using proprietary data to maintain competitive advantages and enhance user engagement and monetization potential.
The report indicates that most internet companies are expected to improve their operating leverage through AI-assisted cost optimization, with some likely to achieve accelerated revenue growth due to the effective deployment of AI agents.
With the rapid adoption of AI assistant tools, efficiency in both work and daily life for consumers is anticipated to increase, potentially freeing up more time for leisure and entertainment activities.
Citigroup expects that sustained demand in travel and online gaming will support stable earnings growth for online travel and gaming companies, offering good diversification for investment portfolios to offset the higher risks associated with AI hype.
For the Chinese internet sector, Citigroup's top picks as core AI investment concepts are Tencent Holdings (00700) and Alibaba-W (09988).
The bank maintains a "Buy" rating on Tencent Holdings with a target price of HK$751, citing favorable prospects for the company's AI development in both enterprise and user applications.
For Alibaba, Citigroup similarly assigns a "Buy" rating with a target price of HK$223, expressing optimism about its performance in cloud revenue growth and efficiency improvements.
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