JPMorgan reassesses China's internet sector: Tencent becomes the top pick

Overview

This report reviews the pricing changes in China's internet sector following the 4Q25 earnings season. It argues that the market is no longer simply rewarding the AI narrative, but is paying more attention to earnings revisions, free cash flow, returns on AI capex, and catalysts with defined timing. Under this new framework, JPMorgan names Tencent as its sector top pick because its combination of valuation floor, self-funded AI investment, resilient earnings expectations, and near-term catalysts is the clearest.

Core views

The core view is that Tencent's current roughly 14x 2026E PE provides a credible earnings floor, and the forecast for about 8% EPS growth in 2026 already incorporates high AI investment. The report believes the market underestimates Tencent's AI monetization potential in advertising, gaming, and the Weixin ecosystem, as well as the scarcity of licensing and distribution capabilities in China's gaming market. By contrast, Alibaba's AI investment lacks sufficient transparency, Meituan's delivery profit improvement is already largely reflected in expectations, and PDD has a more balanced risk-reward profile but insufficient catalysts.

Analysis framework

The report uses a combination of top-down sector re-rating analysis and bottom-up company screening. It first identifies six post-4Q25 earnings-season shifts in the market framework, including earnings revisions driving share prices, AI capex being penalized, regulatory events re-emerging but with limited scope, marginal easing in food delivery subsidy intensity, buy-side position resets, and relative valuation pressure from ByteDance. It then ranks covered companies using four filters.

Methodology notes

• Sector screening frameworkReal valuation multiple plus earnings floor plus clear catalysts

  Use current valuation, downside earnings risk, funding sources for AI investment, and catalysts over the next 3 to 6 months to judge priority in internet stock allocation.

  Low valuation only matters when downside earnings risk is limited; AI investment needs to be supported by existing cash flow and business revenue; if consensus expectations are too low and there is a clear event window, the stock price is more likely to be re-rated.

• AI investment assessmentAI spend self-funded vs dilutive

  Assess whether AI spending is supported by free cash flow and monetization from existing businesses, rather than causing ongoing earnings dilution.

  The report believes Tencent's AI investment scope is relatively clear, with advertising and gaming already contributing monetization and cloud services as the next stage; Alibaba's 'all others' spending is less transparent, so its valuation is more constrained by investment concerns.

• Valuation scenario analysisPE floor, base case and bull case

  Use 12x 2026E PE as Tencent's valuation floor, with a base case of 16-18x after catalysts materialize, and a strong bull case of around 21x.

  The upside case requires Hunyuan to show a credible model inflection point, along with visible disclosure of AI-related revenue; in the current market environment, 21x is viewed as a bull-case scenario rather than the base case.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Tencent (0700.HK)

  sector top pick, the report's core long idea

  Strengths

  Passes all four screens; roughly 14x 2026E PE offers an earnings floor; AI investment is supported by free cash flow; advertising, gaming, and cloud already have or are about to see AI monetization; the long-term optionality of Weixin is not fully priced in.

  Weaknesses

  Short-term upside depends on catalysts such as Hunyuan 3.0 and new game launches; the market remains concerned about AI spending and relative competitive pressure from ByteDance.

  Comparison

  Compared with Alibaba, Meituan, and PDD, Tencent has a more complete combination of earnings floor, investment transparency, and catalysts.

  Risks

  Weak reception to Hunyuan 3.0, AI spending exceeding the RMB36-40bn framework, slower advertising or gaming growth, or ByteDance launching a consumer-facing agent product.

• JD.com (JD)

  selectively favored

  Strengths

  Passes three screens: earnings floor, upside earnings surprise, and catalysts; sequential improvement in losses from new businesses and food delivery could drive earnings upgrades.

  Weaknesses

  Still affected by competition in food delivery and the pace of investment in new businesses.

  Comparison

  Ranks below Tencent, but scores relatively highly on overly low consensus expectations.

  Risks

  1Q26 results fail to show improvement in new business losses, or food delivery competition intensifies again.

• Trip.com (TCOM, 9961.HK)

  selectively constructive view

  Strengths

  Passes three screens: earnings floor, regulatory clearing event, and manageable near-term earnings risk; its 11-12x valuation is attractive.

  Weaknesses

  Still affected in the short term by the outcome of the antitrust investigation and the pace of investment.

  Comparison

  Its catalysts come from the clearing of regulatory events rather than the AI narrative.

  Risks

  A delay in resolving the investigation or an outcome that affects earnings quality.

• Baidu (BIDU)

  AI-related name passing three screens

  Strengths

  Has an earnings floor, self-funded AI investment, and potential catalysts.

  Weaknesses

  After the previous rally driven by the AI narrative, the market is more focused on proof of commercialization.

  Comparison

  It has stronger AI attributes, but the report identifies Tencent as the clearer top pick.

  Risks

  AI commercialization falls short of expectations or the core business comes under pressure.

• Alibaba (BABA)

  passes fewer screening items

  Strengths

  The path of narrowing food delivery losses has already been incorporated by the market, and underlying operating improvement still exists.

  Weaknesses

  The pace of 'all others' AI investment is accelerating with insufficient transparency, causing valuation to be more constrained by investment concerns.

  Comparison

  The report believes Alibaba is more of a multiple-repair story than an EPS-driven story.

  Risks

  AI investment continues to expand without revenue evidence, or competition in food delivery subsidies heats up again.

• Meituan (3690.HK)

  Neutral

  Strengths

  Easing food delivery competition could become a catalyst.

  Weaknesses

  Much of next year's profit improvement is already reflected in consensus expectations, and the normalized profit-per-order range remains wide.

  Comparison

  It lacks Tencent's clear earnings floor and AI upside optionality.

  Risks

  A change in Alibaba's strategic posture leads to a restart of the food delivery subsidy war.

• PDD (PDD)

  balanced risk-reward

  Strengths

  After the recent valuation reset, the risk-reward profile is more balanced.

  Weaknesses

  Regulatory signals and earnings visibility continue to weigh on valuation.

  Comparison

  It lacks the clear near-term catalyst combination that Tencent has.

  Risks

  Regulatory penalties or policy signals around the platform economy continue to affect market sentiment.

Key data

• Tencent FY25 revenueRMB751.8bnUsed to support the view of Tencent's earnings floor and cash flow resilience.
• Tencent FY25 non-IFRS net profitRMB267.0bnThe report believes this profit base can absorb relatively high AI investment.
• Tencent FY25 free cash flowRMB182.6bnSupports the view that AI investment is self-funded.
• Tencent 2025 new AI product investmentRMB18bnDisclosed by management on the 4Q25 earnings call.
• Tencent 2026 AI investment frameworkapproximately RMB36-40bnThe report believes this mainly refers to investment in new AI products, not total company-wide AI infrastructure investment.
• Tencent current valuationapproximately 14x 2026E PEThe report believes this valuation is close to the true earnings floor.
• Tencent current priceHK$504.00The company list shows the price as of the close on April 22, 2026, unless otherwise stated.
• Tencent AI investment sensitivityRMB60bn investment corresponds to about 6% downside to consensus earningsThe report believes there is limited room for further earnings downgrades.

Impact & implications

The investment implication is that China's internet sector is unlikely to receive a broad re-rating in the short term from an abstract AI narrative alone; the market will reward companies with credible earnings floors, clear boundaries around AI investment, and nearby catalysts. Under this framework, Tencent has the clearest asymmetric setup: downside is supported by earnings and cash flow, while upside depends on the delivery of events such as Hunyuan 3.0, Honor of King World, cloud commercialization, and AI revenue disclosure.

Risks

• A renewed regulatory tightening, especially rules that change the economic substance of platform take rates, could reset the earnings floor logic for multiple companies.
• If the food delivery subsidy war restarts due to a change in Alibaba's strategy, it would widen the normalized earnings range for Meituan, Alibaba, and JD.
• A further decline in global risk appetite or continued absence of Chinese fund inflows could suppress valuation expansion.
• If Hunyuan 3.0 is seen by the market as still clearly lagging, it could prolong Tencent's narrative repair cycle.
• If Tencent's AI spending exceeds the current RMB36-40bn framework without revenue evidence, it could trigger capex penalties again.
• Weakness in Tencent's core advertising or gaming businesses would undermine the earnings floor relied upon by the report.
• If ByteDance launches a consumer-facing agent product, it could compress the relative valuation the market is willing to assign to Tencent.

What to watch

• Market reception after the launch of Hunyuan 3.0, especially whether it reaches a domestically leading model standard recognized by investors.
• Revenue ranking after the launch of Honor of King World; the report notes that entering the top three in its first month would strengthen the bull-case scenario.
• Whether Tencent's advertising growth in 1Q26 remains around or above the mid-teens.
• Whether Tencent discloses visible AI-related revenue contribution.
• Whether cloud business commercialization accelerates alongside expanded GPU capacity.
• A second major model or AI application launch later in 2026.
• Whether Trip.com's antitrust investigation is resolved during May to July 2026.
• The extent of improvement in losses from JD's new businesses and food delivery in 1Q26 results.
• Whether two or more core internet companies report 1Q26 core earnings below consensus expectations.