Goldman Sachs China ADR Q2 Earnings Preview: Strong Cloud Growth, Accelerating AI Capex

Overview

This research report provides a forward-looking analysis of Goldman Sachs on the Q2 2026 earnings of China's internet giants. The core conclusion is: although the macro environment remains soft, putting pressure on businesses like advertising, accelerated cloud business growth, an upward cycle in AI capital expenditures, and improvements in unit economics for trading platforms (such as food delivery) will be key focuses for this quarter and the second half of the year. The report maintains 'Buy' ratings for Tencent, Alibaba, Meituan, JD.com, and Pinduoduo, and raises Meituan's target price based on improved food delivery profit expectations.

Core views

Accelerated cloud business growth is the most certain highlight of this quarter. Goldman Sachs expects Alibaba Cloud's Q2 revenue to grow 45% yoy (up from 38% last quarter), mainly driven by AI demand. Although the AI cloud profit margins of Chinese cloud vendors (10-15%) are currently significantly lower than their US peers (AWS approx. 39%), in an environment of computing power shortages, market attention is focused on whether favorable returns can be locked in through long-term contracts and whether the GPU-as-a-Service (GPUaaS) model can drive margin expansion in the coming quarters. Compared to US hyperscale cloud vendors, Chinese vendors have been relatively restrained in capital expenditures over the past two quarters. With domestic chip supply scaling up in H2 2026, the conversion efficiency of capex to revenue is expected to be higher. AI capital expenditure is about to enter a new upward cycle. The report expects that, influenced by increased domestic chip supply and surging token consumption driven by Agentic AI, the quarterly capex scale of China's internet giants will rise from RMB 20-30 billion in Q1 2026 to RMB 40-50 billion in Q3/Q4. Market focus will shift from pure investment scale to funding sources and ROI verification: on one hand, attention is on how giants maintain sustainable financing when capex exceeds operating cash flow (comparing ByteDance's estimated massive expenditure of RMB 400-500 billion in 2026); on the other hand, attention is on the differences in revenue recognition timing and return cycles between internal models (such as Tongyi Qianwen, Hunyuan) and external commercial products (such as MaaS, Agent tools). Trading platform profit growth sees a turning point, especially with significant improvement in food delivery unit economics (UE). Goldman Sachs raised Meituan Food Delivery's mid-to-long term per-order EBIT forecast to RMB 1.1 (previously RMB 1.0), expecting per-order profits in Q2/Q3/Q4 2026 to be RMB 0.4/0.7/0.8, recovering faster than previously expected. This is mainly due to moderating competitive intensity and improved operational efficiency. Meanwhile, JD.com and Meituan's Q2 adjusted EBIT are expected to achieve strong yoy growth of +587% and +56% respectively. For Alibaba, although group EBITA faces short-term pressure due to AI investments (expected -33% yoy), the combined profit of core e-commerce + instant retail + cross-border e-commerce is expected to remain stable, and the EPS revision cycle is expected to bottom out. Valuation systems are increasingly shifting towards Sum-of-the-Parts (SOTP), with clear sub-sector preferences. As AI models, Agent applications, and cloud+chip businesses scale and synergies emerge, the market demands clearer segment disclosure to reprice assets. Goldman Sachs' sub-sector allocation priority is: Cloud & Data Centers (top picks: GDS, VNET, Alibaba Cloud, Kingsoft Cloud) > Gaming & Entertainment (counter-cyclical attributes) > E-commerce & Mobility > AI Models (favoring MiniMax's risk-reward ratio). On specific targets, focus on Tencent's WeChat Agent and Hunyuan model differentiation; Alibaba's potential new segment establishment involving Cloud + T-Head and Qwen strategy; PDD's Temu local warehouse transformation and balancing shareholder returns; JD.com's Joybuy international expansion and buyback potential under improving free cash flow.

Analysis framework

The report adopts a two-layer analysis framework of 'macro themes + individual stock previews'. First, it extracts four common threads across companies (cloud growth, AI Capex, trading platform profit turning point, SOTP valuation reshaping) to establish a benchmark for industry Beta judgment. Second, it dissects 'key financial forecasts (Numbers that matter most)' and 'earnings call core focuses/debates (Key focuses/debates)' for each company individually, mapping industry logic to individual Alpha. In the derivation process, the institution extensively used cross-country benchmarking and industrial chain cross-validation methods. For example, by comparing the capital expenditure intensity, cloud profit margins, and Capex-to-Revenue conversion ratios of US and Chinese hyperscale cloud vendors, it judges the potential profit margin improvement space for Chinese cloud business; by tracking the rhythm of upstream domestic chip supply, it predicts the release time of AI Capex; by analyzing strategy changes of competitors (such as Douyin, ByteDance), it evaluates the sustainability of UE improvement for each platform. This 'top-down direction setting, bottom-up data verification, horizontal benchmarking to find gaps' analytical path constitutes the core derivation logic of this report.

Methodology notes

• Valuation MethodSOTP Segment Valuation

  Sum-of-the-Parts Valuation

  When a company's business is diversified and growth/profit margins vary significantly across segments (e.g., internet giants simultaneously possessing mature e-commerce, high-growth cloud business, and early-stage AI investments), a single PE or PS cannot accurately reflect value. SOTP selects appropriate valuation multiples independently for each business line and sums them up, more precisely capturing the undervalued parts of new businesses like AI and cloud. Meituan's target price increase in this report stems from the upward revision of long-term UE assumptions for the food delivery segment.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Unit Economics (UE) Analysis

  In transactional platforms such as food delivery and instant retail, income and costs are broken down to the 'per order' granularity (such as per-order revenue, per-order fulfillment cost, per-order marketing expense) to judge whether economies of scale truly translate into profitability. This report tracks the gap and recovery slope of per-order profits between Meituan and competitors as a key leading indicator to judge the moderation of competitive landscape and the arrival of the profit turning point.

• Company Fundamentals and Financial FrameworkFree cash flow analysis

  Matching Analysis of Capital Expenditure and Operating Cash Flow

  When enterprises enter a high-intensity AI investment cycle, capital expenditure may temporarily exceed operating cash flow. At this time, it is necessary to assess the sustainability of its financing, the impact of external financing on equity dilution, and the lag period of Capex converting to revenue. This report compares the Capex/OpCF ratios and Capex-to-Revenue conversion efficiency of Chinese and US cloud vendors to judge the financial health and return rhythm of each company's AI investment.

• Competition and Strategy FrameworkMoat / competitive advantage

  Construction of AI Agent and Ecological Barriers

  Against the backdrop of homogenization at the AI model layer, the competitive focus is shifting from 'model parameters' to 'the depth of Agent embedding in workflows'. The report focuses on indicators such as DAU, task completion rate, and repurchase workflows for products like WeChat Agent and WorkBuddy, essentially evaluating who can率先 (be the first) to convert AI capabilities into user stickiness and transaction loops, thereby building a new ecological moat.

Asset mapping & comparison

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

• Tencent Holdings (0700.HK)

  Beneficiary: Robust growth in gaming and advertising, WeChat Agent and Hunyuan model open up AI monetization space

  Strengths

  Rich gaming pipeline, large potential for ad AI efficiency enhancement, unique implementation scenarios for WeChat ecosystem Agents

  Weaknesses

  Soft fintech growth, rising AI Capex may suppress short-term OPM

  Comparison

  More stable gaming and advertising base compared to Alibaba; more prominent advantage in AI ecosystem entry points compared to Meituan

  Risks

  Delays in game license approvals, intensified ad competition, cloud and fintech growth falling short of expectations

• Alibaba (BABA/9988.HK)

  Beneficiary: Accelerating cloud growth becomes the biggest highlight, EPS revision cycle expected to bottom out

  Strengths

  Leading cloud business growth, clear MaaS goals, potential disclosure of new Cloud + T-Head segment enhances transparency

  Weaknesses

  Short-term pressure on CMR, AI investments drag down group EBITA, talent retention faces competition from independent AI labs

  Comparison

  Cloud growth outpaces Tencent but margins lower than AWS; stability of e-commerce portfolio profit weaker than Pinduoduo

  Risks

  GMV growth falling short of expectations, cloud revenue deceleration, poor execution of strategic investments

• Meituan (3690.HK)

  Beneficiary: Rapid recovery of food delivery UE, upward revision of mid-to-long term profit expectations drives target price increase

  Strengths

  Per-order profit recovery slope exceeds expectations, moderating competition in dining/hotel/travel, Keeta expands new growth points

  Weaknesses

  Instant retail and 1P groceries still require investment, uncertainty in overseas Keeta investment scale

  Comparison

  Food delivery UE leads Alibaba by approx. RMB 2/order; dining business faces Douyin competition but shows marginal improvement

  Risks

  Resurgence of competition, rising labor costs, stricter food safety regulation, unexpected Keeta investment

• JD.com (JD)

  Beneficiary: Significant increase in adjusted EBIT, improving free cash flow supports shareholder returns

  Strengths

  Retail profit margins stabilize, new business losses narrow, Joybuy's international differentiation is clear

  Weaknesses

  Revenue growth turns negative, sluggish growth in department store and supermarket categories, continuous investment in price competitiveness

  Comparison

  FCF status better than other giants ramping up AI Capex; logistics experience superior to pure platform models

  Risks

  Slowing e-commerce GMV, high base pressure on home appliances, fluctuating retail profit margins, international execution risks

• Pinduoduo (PDD)

  Beneficiary: Temu localization transformation addresses tariff risks, core business retains cash generation capability

  Strengths

  High growth in transaction commissions, proactive layout of Temu supply chain localization, shareholder return potential waiting to be released

  Weaknesses

  Online marketing revenue turns negative, insufficient segment disclosure causes valuation discount, unclear profitability path for Temu

  Comparison

  Domestic main site GMV growth lags behind industry average; Temu investment intensity lies between Alibaba and JD.com

  Risks

  Geopolitical and tariff policy changes, low-price competition from Douyin shelf e-commerce, delayed Temu profitability

Key data

• China Internet Q2 Profit Growth Forecast-12% yoySignificantly narrowed compared to -35%/-31% in Dec 2025/Mar quarters
• Alibaba Cloud Q2 Revenue Growth Forecast+45% yoyHigher than last quarter's 38%, serving as the group's performance highlight
• AI Capital Expenditure Quarterly Scale ForecastRmb 40-50 billionExpected values for Q3/Q4, significantly higher than RMB 20-30 billion in Q1 2026
• Meituan Food Delivery Mid-to-Long Term Per-Order EBITRmb 1.1Revised up from previously forecast RMB 1.0, driving target price increase
• Tencent Q2 Adjusted Operating Profit+9% yoySupported by Gaming +11%/Ads +18%, FBS growth +8%
• JD.com Q2 Adjusted EBIT Growth+587% yoyBenefiting from improved food delivery UE and narrowing losses in new businesses
• Alibaba Q2 Adjusted EBITA-33% yoyDragged down by AI-related investments, but core e-commerce portfolio profit remains stable

Impact & implications

The report believes that the China internet sector is transitioning from 'profit repair' to the 'verification period of AI-driven new growth curves'. In the short term, accelerated cloud business and improved food delivery UE provide a solid earnings floor; in the medium term, although the upward trend in AI Capex suppresses current profits, if a verifiable commercial loop can be formed in MaaS, Agent applications, or cloud+chip synergy, it will trigger SOTP repricing. For investors, this means the stock selection logic needs to shift from simple GMV/traffic growth to refined screening of AI monetization efficiency, segment profit visibility, and capital allocation discipline. In terms of sub-sector allocation, cloud infrastructure and gaming are placed in priority positions due to higher certainty.

Risks

• Weak macro consumption leads to advertising and e-commerce GMV growth falling short of expectations
• AI capital expenditure return cycle longer than expected, suppressing medium-term profit margins
• Intensified industry competition (especially in food delivery and low-price e-commerce), delaying UE improvement pace
• Game license approval delays or new product launch delays affecting revenues of companies like Tencent
• Geopolitical and tariff policy changes impacting cross-border e-commerce business
• Domestic chip supply scaling up slower than expected, constraining AI Capex release and cloud revenue conversion

What to watch

• Specific guidance from each company's earnings call on AI Capex funding sources and ROI
• Whether Alibaba Cloud + T-Head announces new segment disclosure to enhance valuation transparency
• DAU, task completion rate, and transaction conversion data for WeChat Agent and WorkBuddy
• Recovery slope of Meituan Food Delivery per-order profit in H2 2026 and confirmation of mid-to-long term UE targets
• Changes in Temu local warehouse/local merchant ratios and their impact on profit margins
• JD.com Joybuy international expansion budget and integration progress of Ceconomy acquisition
• Whether industry model layer pricing strategies tend toward rationality after DeepSeek price increases