Spending on artificial intelligence helped give some Chinese tech companies a boost in the first quarter, despite economic headwinds. “The standout for this [first quarter] reporting season was the growth in cloud business for Alibaba and Baidu ,” said Brian Tycangco, an analyst at Stansberry Research. Alibaba said earlier this month its cloud revenue in the latest quarter rose by 18% year on year , while Baidu on Wednesday said its AI cloud business grew by 42% . “At these rates of growth, cloud business is poised to become the 2nd largest business segment for both companies,” Tycangco said. “More importantly, cloud will become the basis for a return to heady growth days after several years of single-digit topline growth.” Alibaba, Tencent and JD.com also reported double-digit growth in marketing revenue, which they said were bolstered by AI tools that were able to target consumers more effectively. The trend signals a fundamental change in Chinese markets. “AI/Tech/New Economy [are] further gaining traction as equity market leaders,” Morgan Stanley’s chief China equity strategist Laura Wang said in a May 20 note. “We believe that a new generation of equity market leaders is forming in these sectors, after a 5-year-long disruption period post market peak in early 2021,” she said, noting how consumer and internet stocks previously led gains. Out of Morgan Stanley’s 60 Chinese AI stock picks, those rated overweight, traded in Hong Kong and with expected upside of more than 50% as of May 19 are: Gushengtang — This health-care company is focused on traditional Chinese medicine, and it’s training targeted AI models to create an “AI physician assistant.” The company said customer visits rose by 12.7% in the first quarter to 1.21 million. Bairong — This cloud-based AI services company is focused on state-owned banks and other financial services companies. The company added in its 2024 annual report that Alibaba’s Taobao and Tmall e-commerce platforms use Bairong’s AI model service to evaluate consumers’ purchasing power. When it comes to more popular names, the Morgan Stanley analysts prefer Alibaba and Tencent over Baidu and iFlytek. They also prefer Meituan, Meitu and Trip.com over Kuaishou and JD.com. Among mainland China-listed companies, 68% mentioned AI in their 2024 annual reports, up from 43% in the first half of 2024, HSBC Qianhai Securities head of research Steven Sun, said in a May 16 report. “We also observed a slightly upward revision of 2025e consensus capex for major cloud service providers after 1Q25 results, suggesting they are still upbeat about their AI business.” The information technology sector saw earnings rise by 24.7% in the first quarter from a year ago on improving AI penetration, the HSBC report said, noting it was one of the fastest-growing sectors. One of HSBC’s buy-rated picks is enterprise software and cybersecurity company Sangfor, listed in Shenzhen, with a price target of 143 yuan. The firm thinks accelerating AI adoption can help drive earnings growth. Chinese-developed DeepSeek surprised global investors in late January with its ability to rival OpenAI’s ChatGPT, while claiming a fraction of development cost. In the months since, several Chinese companies have also released new AI tools for generating video or 3D models. China’s recent tech breakthroughs stem from the country’s breadth of engineers, data and vast social media and e-commerce ecosystem, the Morgan Stanley analysts said, noting how government support can enable faster tech adoption. “We continue to believe that such structural improvement would be less susceptible to the ongoing tariff dispute and the overall macro challenges,” the report said. “This is important in attracting foreign investors to build long-term commitments of allocation, as they discover a decent number of companies that are distinctive and exclusively available in China, despite the broad macro slowdown.” Listed Chinese stocks generate the majority of their revenue domestically, with only 3% U.S. revenue exposure, the analysts said. — CNBC’s Michael Bloom contributed to this report.
Add A Comment