AI investment is reshaping China's internet competitive landscape, with selected leaders expected to benefit from improved profit discipline

Overview

This report comprehensively assesses themes including large model competition, AI capital investment, e-commerce, instant retail, local services, online healthcare and logistics ahead of the second-quarter results of Chinese internet companies. The report judges that industry fundamentals are showing clear divergence: consumer demand and online healthcare regulation pose pressure, but AI commercialization, more rational competition and cost control are expected to improve the earnings and valuations of some leading companies.

Core views

First, China's large model market remains in a period of intense competition, with independent labs and large platforms each having their own advantages, and it may eventually consolidate into three to four leaders; the open-weight ecosystem is conducive to model diffusion, but creates commercialization pressure on closed-source applications that rely on subscription revenue. Second, platforms are shifting resources toward enterprise agents, chatbot marketing spending is cooling, and the phased dividend for advertising media may fade. Third, e-commerce growth has slowed markedly, and BABA's focus has shifted from revenue growth to e-commerce cash flow, cloud computing and profit margins in non-AI businesses. Fourth, competition in instant retail, local services and logistics is becoming more rational, benefiting Meituan's and J&T's unit economics and earnings recovery. Fifth, tighter regulation of prescription drugs, nutrition products and pharmacist reviews will suppress online healthcare sales efficiency and increase the likelihood of a downward revision to JDH's full-year guidance.

Analysis framework

The report makes judgments by combining macro and National Bureau of Statistics e-commerce data, company management guidance, channel checks, industry expert interviews, competitive landscape analysis, segment earnings forecasts and relative valuation; stock valuations primarily use forward P/E ratios, with a focus on comparing target valuations with current valuations.

Methodology notes

• Industry structureCompetitive landscape and market consolidation analysis

  Assess long-term industry concentration by comparing the model capabilities, computing power, cloud services and capital partnership relationships of independent AI labs and large internet platforms.

  The report believes DeepSeek and Moonshot are temporarily leading, Qwen is in the first tier, while Tencent and ByteDance are still catching up; the foundation model market may eventually consolidate into three to four leaders.

• Fundamental researchChannel checks and expert interviews

  Use feedback from channels and industry experts to verify changes in marketing spending, competitive intensity, regulatory enforcement and corporate operating strategies.

  Channel information shows that AI chatbot marketing spending has cooled significantly, and online healthcare platforms have strengthened qualification checks for GLP-1 purchases; expert feedback points to Douyin placing greater emphasis on balancing profitability.

• Earnings analysisSegment margin and unit economics analysis

  Assess business earnings inflection points through EBITA margins, unit economics and cost optimization.

  The report focuses on evaluating AliCloud margins, BABA e-commerce EBITA margins, Meituan food delivery unit economics and cost optimization in J&T's Southeast Asia business.

• Valuation methodsForward P/E comparison method

  Compare the forward P/E ratios implied by target prices with current valuations to assess potential rerating room.

  The target prices of BABA, Tencent, Meituan and J&T imply forward P/E ratios of 22x, 20x, 33x and 15x, respectively, above the current valuations of 16x, 13x, 28x and 11x stated in the report.

Asset mapping & comparison

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

• BABA

  Top pick and core beneficiary of China's internet AI trend; Buy maintained.

  Strengths

  Strong full-stack capabilities spanning chips, cloud infrastructure, the Qwen large model and MaaS; improving margins in non-AI businesses; e-commerce cash flow can support AI investment.

  Weaknesses

  E-commerce CMR remains constrained by low industry growth, and AI investment is sizable.

  Comparison

  Target price USD178, implying 22x CY27F P/E; the current valuation stated in the report is 16x.

  Risks

  Continued weak consumption, AI investment returns falling short of expectations, cloud margin improvement below expectations, and delays in T-Head business progress.

• Tencent (700 HK)

  Top pick and beneficiary of AI platforms; Buy maintained.

  Strengths

  Has three strategic products: Hunyuan, WorkBuddy and WeChat agents; WeChat's more than 1 billion users and large service provider network provide a long-term monetization foundation.

  Weaknesses

  Hunyuan still lags some independent labs and Qwen, and AI spending may suppress FY26 profit growth.

  Comparison

  Target price HKD727, implying 20x FY27F P/E; the current valuation stated in the report is 13x.

  Risks

  Next-generation Hunyuan failing to narrow the capability gap, intensified agent competition, and AI investment causing earnings to fall below market expectations.

• Meituan (3690 HK)

  Top pick and beneficiary of more rational competition in local services; Buy maintained.

  Strengths

  Profitability improvement in the food delivery business may exceed expectations; instant retail subsidy competition is easing; competitors in in-store businesses are placing greater emphasis on profitability.

  Weaknesses

  Summer subsidies and local services competition may still cause short-term profit volatility.

  Comparison

  Target price HKD109, implying 33x FY27F P/E; the current valuation stated in the report is 28x.

  Risks

  Renewed escalation of subsidies, Douyin increasing investment in local services, and consumer demand weaker than expected.

• J&T (1519 HK)

  Top pick and beneficiary of cross-border logistics growth; Buy maintained.

  Strengths

  Strong parcel volume growth in Southeast Asia and other markets; cost optimization and platform pricing support unit economics; anti-involution efforts in China's market help earnings recovery.

  Weaknesses

  The business is sensitive to fuel costs, regional demand and parcel pricing.

  Comparison

  Target price HKD14, implying 15x FY27F P/E; the current valuation stated in the report is 11x.

  Risks

  Rising fuel costs, weakening price support, a pullback in parcel volume growth and renewed deterioration of competition in China's market.

• JDH (6618 HK)

  Online healthcare platform, Buy maintained, but full-year revenue faces downside risk.

  Strengths

  2Q26 online drug sales are still expected to grow approximately 25%, supporting total revenue growth of approximately 16%.

  Weaknesses

  Reduced GLP-1 exposure, strengthened purchase qualification checks and increased manual pharmacist review requirements raise transaction friction and compliance costs.

  Comparison

  The impact of new rules on the second quarter is expected to be limited, but FY26 management guidance may not fully reflect regulatory changes since April and May.

  Risks

  Growth in drugs and nutrition products below assumptions, downward revision to full-year revenue guidance, rising pharmacist staffing costs and constrained automation efficiency.

• Bilibili (BILI US) and Weibo (WB US)

  Potential losers from cooling AI chatbot advertising spending; both rated Neutral.

  Strengths

  Previously benefited from the surge in AI chatbot advertising spending from 2H25 to 1Q26.

  Weaknesses

  Related marketing budgets have cooled significantly, and advertising growth momentum may weaken.

  Comparison

  Compared with platforms that have AI cloud and enterprise agent monetization channels, the two are more directly dependent on advertising spending momentum.

  Risks

  Advertisers continuing to shift budgets from consumer chatbots to enterprise agents and other commercialization channels.

• Kuaishou (1024 HK)

  Video generation application competitor; rated Neutral.

  Strengths

  Kling is one of China's leading text-to-video products.

  Weaknesses

  The closed-source and subscription model may face pressure from open-weight models such as MiniMax H3.

  Comparison

  The report believes Seedance 2.5 may be relatively unaffected due to its stronger capabilities, while Kling faces greater competitive pressure.

  Risks

  Rapid diffusion of open-weight models, declining product differentiation and pressure on subscription monetization.

Key data

• China e-commerce market growth2Q26 up 2.3% YoY; 1Q26 up 7.5% YoYNational Bureau of Statistics data indicate that e-commerce growth continued to slow in 1H26, and the report expects 2H26 to remain relatively sluggish.
• BABA China e-commerce EBITA marginExpected to improve by 1.8 percentage points YoY in the quarter ended JuneExcluding instant retail, this reflects the company's greater focus on profitability in non-AI businesses.
• BABA MaaS guidanceARR exceeding CNY30bn by March 2027The report believes the existing guidance may be too conservative and focuses on whether the company will raise it.
• AliCloud EBITA margin guidance11% to 12% for the June and September quarters, versus 8% to 9% in previous quartersHigh-margin MaaS services and pricing power may drive further expansion during the year.
• Tencent WeChat user baseMore than 1 billion usersWeChat agents can connect users with service providers and may be monetized over the long term through referral commissions.
• JDH 2Q26 forecastOnline drug sales up approximately 25% YoY, total revenue up approximately 16% YoYRegulation was implemented in mid-to-late May, and its impact on the upcoming second-quarter results is expected to be limited.
• JDH FY26 revenue guidanceHigh-teens to 20% YoY growthThe report believes this guidance may not yet fully factor in the impact of tighter regulation of nutrition products and prescription drugs.
• J&T 1H26 parcel volumeTotal parcel volume up 25% YoY; Southeast Asia up 71%; other markets up 120%Growth in Southeast Asia and other markets was significantly higher than the previous FY26E guidance of 50% and 90%, which may drive an upward guidance revision.
• BABA target price and valuationUSD178; 22x CY27F (FY28F) P/EThe current valuation stated in the report is 16x.
• Tencent target price and valuationHKD727; 20x FY27F P/EThe current valuation stated in the report is 13x.
• Meituan target price and valuationHKD109; 33x FY27F P/EThe current valuation stated in the report is 28x.
• J&T target price and valuationHKD14; 15x FY27F P/EThe current valuation stated in the report is 11x.

Impact & implications

The concentration of industry resources toward AI infrastructure, MaaS and enterprise agents will give platforms with chips, cloud services, models and application ecosystems stronger strategic optionality, while forcing them to improve profit discipline in traditional businesses. Weak e-commerce demand means the market will place greater emphasis on cash flow and margins rather than pure revenue growth. Easing competition in instant retail, local services and logistics is favorable for Meituan's and J&T's earnings recovery; by contrast, a pullback in chatbot advertising spending, the spread of open-weight video models and tighter online healthcare regulation create pressure on Bilibili, Weibo, Kuaishou and JDH, respectively.

Risks

• China's consumer confidence remains weak, causing 2H26 e-commerce growth to fall further below expectations.
• Large model competition and the open-weight ecosystem cause commercialization returns from models and applications to fall short of expectations.
• AI capital investment is too high, suppressing short-term profit growth and free cash flow at platforms such as Tencent.
• AI chatbot marketing spending continues to decline, dragging on advertising media revenue.
• Further tightening of regulation on prescription drugs, GLP-1 and nutrition products raises online healthcare compliance costs and depresses sales growth.
• Local fiscal pressure leads to reductions, delays or suspensions of tax rebates for high-tech industries, pushing up the effective tax rates of internet companies.
• The instant retail, local services or logistics industries fall back into subsidy and price competition.
• Target prices may not be achieved due to macro, market and company earnings deviations from forecasts and other factors.

What to watch

• Whether BABA raises its guidance for MaaS ARR exceeding CNY30bn by March 2027.
• Whether AliCloud EBITA margin can reach 11% to 12% and expand further during the year.
• T-Head's IPO timetable and whether it starts selling chips directly to customers.
• BABA's annual cloud conference held from September 22 to 24, 2026, and new technology releases.
• Whether Tencent's next-generation Hunyuan can narrow the gap with leading models after its expected October release.
• The official launch of WeChat agents, service provider connectivity capabilities and commission monetization model.
• Whether Meituan's food delivery business can continue to maintain positive unit economics in 3Q26.
• Whether J&T raises its FY26E parcel volume growth guidance for Southeast Asia and other markets.
• Whether JDH adjusts its FY26 revenue guidance, and the actual sales impact of new rules on prescription drugs and nutrition products.
• Whether internet companies disclose reductions in tax rebates or increases in effective tax rates.
• Whether Bilibili's and Weibo's AI-related advertising revenue continues to lose momentum.