Stock Synopsis: Top China Internet companies continue to enjoy global reach, business model monetization, and new improvements in sales and profits.

Stock Synopsis: China Internet tech titans continue to grow amid greater competition.

We launch our unique coverage of top 25 China Internet stocks. In the post-pandemic period, we believe the mainstream fundamental forces reflect some steady and robust consumption recovery, although the Chinese economy now faces some rare headwinds and challenges. Specifically, China suffers from socio-economic malaise in the residential real estate sector, and the Xi administration now directs new fiscal stimulus programs toward macro recovery across the mainland financial markets (Shanghai, Shenzhen, Hong Kong, and Macao). Key tech titans benefit substantially from the macro maneuver. These tech titans include Tencent (TME), Alibaba (BABA), Baidu (BIDU), NetEase (NTES), PinDuoDuo (PDD), JD.com (JD), iQiyi (IQ), Bilibili (BILI), Kuaishou Technology, and Meituan. The Xi administration continues to focus on common prosperity and the wider Chinese dream in the dual form of high-quality economic growth and technological advancement with an increasingly supportive regulatory environment. We expect global institutional investors to partially re-engage with the strategic sector of top 25 China Internet stocks in the next few years. From BlackRock and Vanguard to State Street and PIMCO, these global institutional investors choose to revisit these China Internet stocks with unique historical distortions in their fundamental prospects and financial results over the past pandemic years. As China Internet has historically been a cyclical high-growth sector, we can expect to see mid-to-long-run sustainable compound growth rates in both sales and profits. With the latest technological advances in artificial intelligence, virtual reality, and 5G high-speed telecommunication, at least some, but not all, of the top 25 China Internet stocks enjoy favorable and impressive P/E and P/B multiples due to positive network effects, information cascades, and scale and scope economies from the massive population of 1.4 billion people in China (or more than 1 billion smartphone users in Mainland China).

As the mainstream business models for China Internet (e-commerce, online advertisement, and digital entertainment) seem to have reached their mature stages, we expect to see huge opportunities for some China Internet companies to generate mid-to-longer-term sustainable growth rates, high-single-digits to even double-digits, in both sales and profits as the broader sector pursues substantial productivity gains due to AI, VR, and 5G new technology adoption. We believe the supportive regulatory environment would be especially favorable to several Chinese tech titans across several vital niche sectors such as video games, Esports, cloud services, electric vehicles (EV), and autonomous robotaxis. These vital niche sectors seem to amount to RMB$3 trillion annual sales by 2025-2027. Also, business services and fintech platforms provide hefty long-term growth opportunities, despite economic policy uncertainty around business model monetization, antitrust scrutiny, and e-commerce regulation in China. In summary, we combine our proprietary alpha stock signals, fundamental insights, and new ESG scores to help better inform our top-of-mind China Internet stock investment themes.

 

What are the mainstream characteristics of the modern Chinese economy with a new class of top 25 China Internet companies?

Over the past 35 years, China has successfully transformed from a low-income economy to a mid-income East Asian country with a secure and robust middle class, better employment, higher-quality economic growth, and a reasonably better quality of life. Since October 2022, the most recent National Congress of the Chinese Communist Party (CCP) has formalized the next phase of China’s economic governance framework. In this broader context, China’s regulatory regime changes over the Internet incumbents can help shift the delicate balance in favor of both economic and non-economic policy goals such as fair competition, consumer protection, and online data security. In addition to other risk considerations, these regulatory changes can help boost significantly the equity risk premiums for the Internet incumbents in recent years. These tech titans have risen to the challenge with almost real-time adjustments in their business models, monetization strategies, and best practices to help further extend sustainable sales growth and operational profitability in the longer run.

These Chinese tech titans still face several business risks as the recent regulatory changes affect the medium-term sales, profits, and cash flows across the entire Internet sector. The Chinese government launches new Internet rules and regulations in support of better online consumer protection, privacy control, social surveillance, and freemium monetization. These new Internet rules and regulations seem to cause a pervasive slowdown in online sales for e-commerce, advertisement, mobile video games, and Esports etc. At the same time, these Internet rules and regulations may inadvertently reduce corporate support for new initiatives and innovations in cloud services, fintech platforms, electric vehicles (EV), and autonomous robotaxis (AR), in-game purchases, and some other online business processes. Despite the recent demographic changes and structural challenges such as post-pandemic healthcare, rural poverty, and longer longevity, and Sino-American trade rivalry, Chinese tech titans can continue to benefit substantially from the largest middle class worldwide, a potent consumer market, robust and resilient global supply chains, new online growth engines, and extensive regional manufacturing capabilities in East Asia. In time, these competitive advantages help secure favorable foreign investment returns. In combination, these economic insights shine new positive light on at least some, but not all, of the top 25 China Internet companies.

The vast majority of the top 25 China Internet companies are likely to further leverage online business models and freemium monetization capabilities through world-class cloud services and software solutions (Software-As-A-Service (SAAS)) outside the traditional consumption sector. Also, the China Internet companies can further tap into the large consumption sector with more inclusive fintech platforms, local merchant services, and food delivery robotaxis. For several Chinese tech titans such as Alibaba (BABA), Tencent (TME), and Baidu (BIDU), their foreign subsidiaries can further expand their geographical reach to the rest of the world, especially North America, Western Europe, and East Asia. All of these recent developments help accelerate the next paradigm shift in the CCP’s national strategy in favor of longer-term growth performance for the Internet incumbents. To the extent that the financial benefits can manifest in higher sales, profits, and cash flows across the China Internet sector, we believe the dominant tech titans retain rare unique business niches and competitive advantages in support of both favorable stock market valuation and operational performance. These recent economic policy developments reflect at least part of the paradigm shift toward increasingly more inclusive state capitalism with Chinese characteristics.

In practice, the conventional economic theories cannot perfectly explain the growth miracles in China over the past 35 years. The new classical theory fails to account for monetary non-neutrality, a lack of monetary policy effectiveness due to strict cross-border capital controls, and significantly less fiscal-monetary policy coordination in Mainland China. Also, the New Keynesian theory fails to explain the adverse impact of interest rate hikes on residential real estate prices in light of substantially lower residential property affordability in Mainland China in recent years. In addition, structural supply-side reforms may or may not help render global supply chains more robust and more resilient in response to hefty changes in world demand for high-tech advancements, such as semiconductor microchips, graphical processing units (GPU), 5G high-speed telecom networks, and virtual realty (VR) headsets for the metaverse. In light of these economic considerations, we believe it takes a totally new skillset and macro analytical framework for us to better understand the new China Internet sector. In essence, China Internet serves as a cyclical fair-trade sector in the current trade war between the U.S. and China. This China Internet sector seems to be less of a buy-and-hold investment theme for many global institutional investors, although the Xi government seeks to re-establish the longer-term sustainable growth outlook for the China Internet sector.

During the pandemic years from 2020 to 2023, the vast majority of the top 25 China Internet stocks experienced sharp decreases in stock market valuation by at least 25% to 45%. We can attribute this significant industry rotation to a few fundamental reasons. First, extremely strict anti-epidemic measures not only compressed domestic consumption, but also raised rampant concerns about the Xi administration’s Covid exit strategy. As a result, institutional investors withdrew their foreign capital in a new flight to higher quality. Second, key Internet incumbents were particularly vulnerable to new geopolitical tensions in light of the trade war between the U.S. and China, the Russia-Ukraine war in Eastern Europe, and the relentless regional conflict between Israel, Iran, Lebanon, Hamas, and the Palestinians. Third, at least some of the fiscal and monetary stimulus programs turned out to be weak and ineffective in response to sluggish economic growth, deflation, unemployment, and residential real estate slowdown in China. Fourth, the Xi administration chose to clamp down on the spiritual opium of online video games by restricting children from playing these video games more than one hour per day. This draconian policy measure inevitably led to significantly less monetization for several China Internet companies such as Tencent (TME), Weibo (WB), NetEase (NTES), iQiyi (IQ), Baidu (BIDU), and ByteDance (the parent company of the globally popular video-sharing app TikTok). Finally, the current series of interest rate hikes from the People’s Bank of China (PBOC) further compressed stock market valuation for many of the China Internet companies in recent years.

 

For the top 25 China Internet stocks, some of the major economic headwinds can turn into new economic tailwinds in the next few years.

As we re-assess the keystone fundamental factors and forces for the recent industry rotation away from the China Internet sector, we believe most of these considerations seem to have turned from economic headwinds to at least incrementally positive economic tailwinds. Back in December 2022, the Joint Disease Prevention and Control Mechanism of the CCP’s State Council published 10 Covid exit policy measures. These measures included lifting all Covid tests and health code requirements for domestic travel and some foreign travel in the Pacific region. From early-January 2023 onwards, China’s National Health Commission announced downgrading Covid to a Level 2 epidemic disease. The CCP’s State Council further released a series of travel policy measures to better mold the post-pandemic new normal steady state. These policy measures included removing Covid tests and quarantines for inbound travelers, cancelling passenger load restrictions on international flights, and optimizing domestic travel arrangements between Mainland China and Hong Kong and Macao.

Although some other geopolitical tensions persist in the post-pandemic period, the Chinese government has chosen to effectively reset the clock for China Internet American Depositary Receipts (ADR) de-listing risks for at least 3 years. The CCP’s Public Company Accounting Oversight Board (PCAOB) announced in December 2022 a new requirement for issuer audit engagements for all Chinese companies with headquarters in Mainland China, Hong Kong, and Macao. In accordance with the Chinese SEC statement, this policy change empowered the SEC to investigate completely issuer audit engagements for China Internet companies with ADR arrangements in America. We believe this positive development would effectively remove the de-listing risks for several China Internet companies for at least 3 years. In spite of the fair-trade rivalry between the U.S. and China, these tech titans would continue to enjoy dual status in China and America for greater foreign capital diversification.

The CCP’s Central Economic Work Conference (CEWC) reiterated its central emphasis on economic development and macrofinancial stability in the 5-year time frame from early-2023 to late-2027. First, the CEWC aims to help boost substantially domestic demand with state subsidies, tax breaks, and other non-cash incentives in support of greater household income, consumption, and investment. Second, the CEWC seeks to transform the modern industrial system with AI, VR, and 5G high-speed online networks, upgrades, digital downloads, and green energy solutions. Third, the CEWC attempts to help ensure equal government support for both state and private enterprises (outside some strategic sectors such as semiconductor microchip production, high-speed cloud computation, artificial intelligence (AI), virtual reality (VR), and the metaverse etc). Fourth, the CEWC welcomes foreign direct investments (FDI), especially from North America, Western Europe, and some parts of the Asia-Pacific region. Fifth, the CEWC takes some effective policy measures to prevent macro financial risks, with a central emphasis on promoting stable and robust economic development in the residential real estate market. In this broader context, we believe many of the prior fundamental factors, forces, and considerations seem to have turned from major economic headwinds to at least incrementally positive economic tailwinds.

For the online gaming sector specifically, we believe the regulatory environment has become more benign with substantially more license approvals for video games in recent years. The National Press and Publication Administration (NPPA) approved far more than 150 domestic game titles from October 2022 to mid-2024. The vast majority of the resultant game licenses were for mobile games, and the residual game licenses were exclusively for PC and console games. One of the most popular Chinese video games turns out to be Black Myth: Wukong. Its game play follows the inspiration from the classical Chinese novel Journey to the West, and then follows an anthropomorphic monkey Sun Wukong from the novel. This action role-play video game allows each player to fight both villains and monsters through the westward journey with a unique staff in 3 different staff stances (the smash, pillar, and thrust stances). Through this rare unique gameplay and storyline, the black myth for Wukong symbolizes the current world reality that China continues to deal with domestic socio-economic policy issues under fair-trade pressures from the U.S. and its western allies.

By comparison, the NPPA approved only 54 foreign game titles within the same time frame. This clear comparison indicates a more benign regulatory environment for the online gaming sector in China, although the Xi administration characterizes online video games as modern spiritual opium for children, and as a result, imposes a strict restriction on screen time of no more than one hour per day. On balance, we believe the broader regulatory environment for Chinese video games continues to be relatively benign. However, some of the China Internet companies may find it harder to monetize on freemium mobile games, digital downloads, in-game purchases, cosmetic avatar accessories, and software upgrades due to the stringent restriction on screen time in China.

For the fintech sector specifically, Ant Financial Group’s consumer finance unit received new regulatory approval from the Banking and Insurance Regulatory Commission (BIRC) in late-2022 to raise additional capital from RMB$8 billion to RMB$18.5 billion. Ant Financial Group continues to serve as the largest shareholder with a unique 50% majority equity stake in the consumer finance company after this major capital injection. As of mid-2024, Ant Financial Group runs the world’s largest mobile fintech payment platform, Alipay, with more than 1.3 billion users and 80 million merchants in China. Through these central business operations, Ant Financial Group continues to provide inclusive and convenient mobile financial services to both retail consumers and small-to-medium enterprises (SME) in China.

More broadly, the Cyberspace Administration of China (CAC) seeks to encourage profitable and sustainable development of Internet tech titans in China. Specifically, the CAC attempts to favor open and transparent economic development with supportive regulatory norms and values in addition to social and economic benefits for many Internet companies. In the longer run, we believe many Internet companies can benefit substantially from the broader benign and supportive regulatory environment in China. In support of better technological advances, this economic reality remains rock-solid especially when the Chinese government seeks to further outcompete the U.S. and its western allies in several technologically driven markets, such as e-commerce, video games, cloud services, fintech platforms, electric vehicles (EV), autonomous robotaxis (AR), and even business services worldwide.

All these positive fundamental factors, forces, and considerations shine new light on China Internet tech titans. From BlackRock and Vanguard to State Street and PIMCO, many global institutional investors are likely to revisit our chosen top 25 China Internet stocks, some of which list their foreign equity stakes as ADRs on NYSE and NASDAQ. To the extent that we expect the China Internet companies to experience fundamental improvements in both sales and profits over the next few years, we believe some of the Chinese tech titans are likely to see greater and faster bottom-line growth acceleration in 2024-2026. In a fundamental view, our top targets include Tencent (TME), Alibaba (BABA), Baidu (BIDU), iQiyi (IQ), PinDuoDuo (PDD), NetEase (NTES), JD.com (JD), Bilibili (BILI), Kuaishou Technology, and Meituan.

In a post-pandemic fundamental view, we prefer direct consumption, e-commerce, and other local community merchant services, to online ads, search engines, and digital forms of video entertainment (mobile video games, films, movies, and live concerts), because we believe direct consumption would be the earliest to deliver tangible top-line and bottom-line benefits through more robust and more resilient global supply chains in the next few years. From an online regulation perspective, we believe online games garner the greatest growth potential for positive sales surprises due to the broader, more benign, and more inclusive regulatory environment in light of the major domestic video-game license approvals in recent years. In a normative view, we believe some of the top 25 China Internet companies, especially video game publishers, can out-compete their North American, European, and Japanese rivals in due course. Specifically, we expect to see more new video games with the unique Chinese characteristics of game progressions for fair monetization. Black Myth: Wukong serves as a good example of this gameplay design in the broader context of Historical Mandarin China. Tencent (TME) and NetEase (NTES) arise as the 2 largest mainstream Chinese video game publishers with global ambitions. In addition to these China Internet stocks, we would prefer some other China Internet stocks with cyclically lower stock market valuation but rock-solid fundamental momentum. These other China Internet stocks include Bilibili (BILI), iQiyi (IQ), and Kuaishou Technology. Billions of Chinese viewers continue to enjoy video clips, films, movies, soap opera series, manga animations, and other forms of online entertainment from Bilibili (BILI), iQiyi (IQ), and Kuaishou Technology. These China Internet operators can differ dramatically from western video-streaming platforms such as Netflix (NFLX), Amazon Prime (AMZN), Apple TV (AAPL), YouTube (GOOG), and Disney+ (DIS), because the former often tailor their online video contents to the increasingly capitalist, inclusive, but Chinese modern life with smartphones, mobile payments, almost real-time reviews, and many other high-tech software solutions.

 

We believe some top-of-mind China Internet companies continue to enjoy global reach, new business model monetization, and potential improvements in sales, profits, and stock market valuation multiples.

These Chinese tech titans still face several business risks as the recent regulatory changes affect the medium-term sales, profits, and cash flows across the entire Internet sector. The Chinese government launches new Internet rules and regulations in support of better online consumer protection, privacy control, social surveillance, and freemium monetization. These new Internet rules and regulations seem to cause a pervasive slowdown in online sales for e-commerce, advertisement, mobile video games, and Esports etc. At the same time, these Internet rules and regulations may inadvertently reduce corporate support for new initiatives and innovations in cloud services, fintech platforms, electric vehicles (EV), and autonomous robotaxis (AR), in-game purchases, and some other online business processes. Despite the recent demographic changes and structural challenges such as post-pandemic healthcare, rural poverty, and longer longevity, and Sino-American trade rivalry, Chinese tech titans can continue to benefit substantially from the largest middle class worldwide, a potent consumer market, robust and resilient global supply chains, new online growth engines, and extensive regional manufacturing capabilities in East Asia. In time, these competitive advantages help secure favorable foreign investment returns. In combination, these economic insights shine new positive light on at least some, but not all, of the top 25 China Internet companies.

The vast majority of the top 25 China Internet companies are likely to further leverage online business models and freemium monetization capabilities through world-class cloud services and software solutions (Software-As-A-Service (SAAS)) outside the traditional consumption sector. Also, the China Internet companies can further tap into the large consumption sector with more inclusive fintech platforms, local merchant services, and food delivery robotaxis. For several Chinese tech titans such as Alibaba (BABA), Tencent (TME), and Baidu (BIDU), their foreign subsidiaries can further expand their geographical reach to the rest of the world, especially North America, Western Europe, and East Asia. All of these recent developments help accelerate the next paradigm shift in the CCP’s national strategy in favor of longer-term growth performance for the Internet incumbents. To the extent that the financial benefits can manifest in higher sales, profits, and cash flows across the China Internet sector, we believe the dominant tech titans retain rare unique business niches and competitive advantages in support of both favorable stock market valuation and operational performance.

We expect to see longer-term sales growth opportunities for some China Internet companies to pursue productivity gains with regulatory tailwinds. Domestic sales growth opportunities arise predominantly in the Internet cloud services, high-speed online networks, and business services. From Baidu (BIDU) and Alibaba (BABA) to Tencent (TME), key Internet operators often choose to work with some strategic partners in association with the recent digitization of online transactions for e-commerce, entertainment, and the modern life in Mainland China. Chinese e-commerce involves Alibaba (BABA), Baidu (BIDU), Tencent (TME), PinDuoDuo (PDD), JD.com (JD), and Meituan. Also, Chinese entertainment involves iQiyi (IQ), NetEase (NTES), Bilibili (BILI), iQiyi (IQ), and Kuaishou Technology. All the resultant online apps and cloud services continue to pervade the increasingly inclusive, convenient, and cost-effective modern life in China.

In the next few years, we can expect potential regulatory tailwinds to help promote new sales, profits, and cash flows for 3 strategic sectors: mobile video games, cloud services with virtual reality (VR) headsets, and autonomous robotaxis (AR). In combination, we can expect these 3 strategic sectors to grow to RMB$3 trillion by 2025-2027. In the Chinese domestic market, both business services and fintech platforms further provide sizable long-term monetization growth opportunities, despite relatively high economic policy uncertainty across the Greater China region.

A recent Newzoo surveys shows that the global market for video games amounts to US$150 billion outside China. This global market size is almost 3 times the corresponding market for video games in China. For this fundamental reason, we believe the total addressable market (TAM) can be especially rich and ripe for several Chinese video game publishers to consider expanding the global reach of their new titles over the next few years. In this specific context, Tencent (TME) and NetEase (NTES) arise as the 2 largest mainstream Chinese video game publishers with global ambitions, especially in North America, France, Germany, Japan, and South Korea. In terms of the mainstream gameplay genres, storylines, and design features, Chinese game developers are particularly strong in role-play games (RPG) (Genshin Impact and Song of the Cloud City), strategy games (Clash of Clans and Puzzle & Survival), as well as battle royale (Fortnite, PUBG, and Knives Out). Chinese video game publishers are likely to come up with new globally popular hits like Genshin Impact with open-world adventures, storylines, fair and smooth game progressions, fast and furious battle actions, and futuristic AI scenes, films, and animations. In time, we believe these Chinese video game publishers are likely to face intense competition from Activision Blizzard (now part of Microsoft (MSFT)), Electronic Arts (EA), Take-Two (TTWO), and many other video game publishers worldwide.

From Fortnite to PUBG, the battle royale gameplay storylines and design features continue to dominate the global market for video games in the meantime. The battle royale gameplay has become tremendously popular worldwide in light of the pervasive elements of survival-and-shooter games in fast and furious game progressions, storylines, and animations with substantially greater social engagement, immersion, and user experience. The current battle royale genre blends the creative and explorative adventures of survival games with the last-man-standing gameplay of many multi-player and first-person shooters. This unique survival gameplay challenges each player to secure weapons, shields, sheaths, and so forth to fight opponents. At the same time, each player has to avoid falling into traps outside of a shrinking safe base. In the battle royale gameplay, the ultimate winner is usually the last man standing on scarce and finite amounts of weapons, shields, sheaths, and several other resources.

The rapid rise of the battle royale gameplay has garnered significant attention in recent years. With the ongoing steady and remarkable momentum of Fortnite specifically, we believe most institutional investors focus more on the positive financial impact of these shooter games in the broader context of greater social engagement. With substantial capital investments over the past few years, each successful battle royale launch can provide long-term monetization across the mobile, console, and PC markets for video games. For this fundamental reason, the battle royale gameplay is not just another short-term fad. As the battle royale gameplay further attracts the younger and female demographic segments into the brave new world of video games, the resultant global phenomenon continues to expand the broader economic pie for video games worldwide.

 

Specifically, some China Internet tech titans demonstrate huge top-line potential across both AI-driven cloud services and autonomous robotaxis (AR).

The top 25 China Internet companies contribute to more than 85% of all cloud sales in China. In recent years, these cloud sales continue to grow exponentially at 45% to 55% compound annual growth rates. In the meantime, Alibaba Cloud (Aliyun), Tencent Cloud, Huawei Cloud, and Baidu Cloud remain the mainstream dominant cloud service providers in China. As the growth engine of China’s cloud services shifts from Internet to non-Internet and government operators in the next few years, we can expect China’s cloud market power, potential, and profitability to shift towards the dominant telecom companies, China Telecom, China Mobile, and China Unicom, due to their close relations with the Chinese government, in addition to operational synergies with their broadband benefits, products, and services.

Unlike state enterprises and government agencies in China, the private sector continues to further digitize their central business operations at a faster pace. This new pace significantly correlates with cloud sales cyclicality in a fundamental view. As a result, private companies often accelerate the recent pace of digitization across their broad business operations in an economic upturn, and then gradually slow down this pace in an economic downturn.

In recent years, both Alibaba Cloud and Tencent Cloud seem to experience significant sales growth slowdown. Several fundamental factors, forces, and considerations help explain this growth slowdown. First, the major macro headwinds arise from more stringent antitrust rules and regulations and macrofinancial meltdowns in the residential real estate sector. Second, Alibaba Cloud and Tencent Cloud have chosen to strategically rotate from high-quality cloud services to more profitable cloud operations with faster broadband speed and lower latency. Third, these mainstream cloud service providers still need time to recover from their recent losses of foreign clients outside China. Fourth, both Alibaba Cloud and Tencent Cloud face greater competition from the dominant telecom operators in China, especially on new cloud projects in support of state enterprises and government agencies in Mainland China. From a macro perspective, we can expect these tech titans to lose cloud sales momentum in the next few quarters, as the Chinese government has yet to resolve the current macro-financial problems at this specific juncture of the current real business cycle. When the Chinese real economy picks up new growth momentum, Alibaba Cloud, Tencent Cloud, and several other major cloud operators are likely to benefit substantially from higher profit margins, in light of both the central integrators and key outsourcing partners in the cloud value chain.

We now regard autonomous robotaxis (AR) as one of many top-line and bottom-line growth opportunities in the broader context of incrementally positive policy tailwinds in the medium term. Over the next few years, we expect China’s domestic sales for AR to reach RMB$250 billion to RMB$300 billion. This impressive AR market penetration may inadvertently shatter consumer confidence in the adjacent traditional taxi and ride-hailing business segments. In practice, the new growth pace of AR adoption can soon reach an inflection point as the labor cost ratio falls below the driver payout ratio of the conventional ride-hailing business model, about 80% to 85%, in a fundamental view. Either as early technology adopters or taxi fleet managers, some China Internet companies seek to tap into the massive market for AR. As the next big, broad, and fully humanless AR adoption and lower-cost structure optimization reach some critical threshold for the AR total addressable market (TAM), the resultant cost advantages can forge flywheel ripple effects on more affordable autonomous transport and mobility solutions for the average consumer in China. We expect this gradual transformation to manifest first in the major cities along the east coast of Mainland China, Hong Kong, and Macao.

Baidu (BIDU), Pony.ai, and AutoX blaze the trail for AR in China. These AR early technology adopters further serve as AR fleet managers in many cities in Mainland China, Hong Kong, and Macao. In the next few years, these AR trailblazers can move fast to compete directly with the main EV makers such as BYD (KKR), Tesla (TSLA), Nio (NIO), XPeng (XPEV), and Li Auto in China. If we apply a medium-term 20% AR prevalence across the transport market in China, the mainstream AR trailblazers are likely to attain annual sales of RMB$250 billion to RMB$300 billion. In the longer term, we can choose to err on the more conservative side as these AR trailblazers share a unique competitive equilibrium with the EV manufacturers in China. Through horizontal integration, these mainstream AR trailblazers can expand their manufacturing capacity to robotaxis, robobuses, and robotrucks. We believe the next major development of AR tech solutions can shift a fundamentally meaningful size of market value from mass production to service consumption, as the traditional transport sector often seems to commoditize new mobility vehicles with eventually intense price competition in due course. In the next few years, we expect both software suppliers and fleet managers to redefine the AR business model in China. For the average consumer, AR technology can help minimize man-made traffic accidents, or 95% of all kinds of traffic accidents due to human navigation errors and mistakes.

In China, AR adoption depends on not only technological advancement but also government support with positive policy tailwinds in favor of artificial intelligence, energy efficiency, and transport microchip design. In response to the Internet Connective Vehicles (ICV) program, as part of the State Council’s big, bright, and broad Made-in-China-2025 longer-term vision, Baidu Apollo, Pony.ai, and AutoX arise as the major AR trailblazers with lean startup iterative continuous improvements in recent years. Specifically, a recent State Council survey shows that Level 2 ICVs are likely to account for more than 70% of total vehicle sales in China by 2030. Also, the same survey shows that Level 3 ICVs may account for another 15% to 20% of total vehicle sales in China by 2030. Through the same time frame, Level 4 ICVs are likely to emerge at scale on some urban streets and open highways in China. With fully driverless transport, the mainstream AR technological advances include adaptive cruise control, active steering guidance, anti-lock automatic brakes, GPS navigation satellites, and higher-quality driver-assistance systems (DAS) etc. These new AR design features, functions, and benefits help mold each driverless transport journey into a substantially safer part of the modern life. For all these fundamental reasons, we now regard AR as one of many top-line and bottom-line growth opportunities in the broader context of positive policy tailwinds in China.

Around the world, most governments require all kinds of vehicle manufacturers to install long prevalent DAS with automatic safety valves, GPS navigation satellites, and adaptive cruise control advances in the vast majority of Level 1 and Level 2 ICVs. In the meantime, Level 3 and Level 4 DAS requirements still need to go through various stages of rigorous tests prior to more pervasive commercialization in light of country-specific rules and regulations. Indeed, the Level 3 and Level 4 DAS requirements are likely to become the new normal steady state for all kinds of ICVs on a global scale in due course.

 

For several keystone China Internet stocks, we can draw vitally important lessons from some other countries and regions such as North America, Western Europe, and East Asia.

In Chinese e-commerce, we can expect to see some normalization of domestic demand for both online and offline activities in the next few post-pandemic years, as Covid-19 seems to have disrupted many offline activities such as logistics, inventory controls, supply networks, and product delivery systems, all in support of most e-commerce in the Greater China region (Mainland China, Hong Kong, Macao, Taiwan, and even Singapore and Malaysia). Over the longer run, we believe Covid should not affect the mega trend of e-commerce penetration in China. Covid would only continue to affect the top-line growth pace of e-commerce in China. For this fundamental reason, we expect Chinese e-commerce to harness a healthy fraction of total retail sales in light of 4.3%-4.5% annual GDP growth in China over the new few years. As these overall retail sales are likely to rebound in China, Chinese e-commerce companies continue to dominate the macro demand for discretionary items such as clothes, electronics, and luxuries etc. These e-commerce companies include Alibaba (BABA), PinDuoDuo (PDD), JD.com (JD), and Meituan. Historically, these e-commerce companies collectively capture more than 45% of total retail sales for clothes, electronics, and luxuries in China. We expect this mega trend to persist for the foreseeable future.

Several fundamental factors, forces, and considerations can affect the general outlook and current stock market valuation for these e-commerce companies in China. First, institutional funds worldwide continue to flow in and out of these e-commerce companies through their ADRs and their Hong Kong stocks. Second, macro demand, consumption, and investment can recover substantially with some partial remedies from state subsidies, tax rebates, fiscal stimulus programs, and other non-cash incentives from the Chinese government. Third, the recent pandemic memory seems to have heightened the broad awareness that the average consumer should hoard daily discretionary items via e-commerce well in advance of the next similar crisis. From North America, Western Europe, and East Asia, we can perhaps deduce the same set of fundamental lessons for not only these key e-commerce companies in China, but also more broadly, Amazon (AMZN), eBay (EBAY), Walmart (WMT), Target (TGT), Etsy (ETSY), Shopify (SHOP), Best Buy (BBY), Shopee (SE), Lazada, Flipkart, and Tokopedia.

We believe online ad platforms seem to have reached mass market maturation. In Mainland China, new online ad sales recovery depends on both the advertiser mix and the nature of each ad (Pay-Per-Click for better monetization performance or Cost-Per-Impression (CPM) for brand loyalty). Across the Greater China region, the vast majority of online ad sales arise from Internet search and e-commerce. In the next few years, online advertisers are likely to prioritize inventory clearance over new product launches and brand associations. Moreover, online advertisers are likely to specifically target travel, direct consumption, and other retail product categories in support of greater retail sales recovery over the Greater China region. We believe this new normal steady state pervades the vast majority of online ad experiences in the post-pandemic era worldwide.

Specifically, we can expect hefty stock market alphas to gradually arise-and-persist in favor of Baidu (BIDU), Tencent (TME), AutoHome (ATHM), Kuaishou, and Weibo. Since the Covid pandemic years, the pure-play online ad platforms continue to trade near over one standard deviation below their own respective historical average P/E ratios. For instance, AutoHome (ATHM) trades at a 2025E P/E ratio of 11.8 (–1 stdev); Baidu trades at a 2025E P/E ratio of 10.9 (–1.7 stdev); and Weibo trades at a 2025E P/E ratio of 8.2 (–1.1 stdev). These Internet ad platforms seem to trade at a deep discount relative to their global rivals and competitors, such as Facebook (META), Google (GOOGL), Amazon (AMZN), Pinterest (PINS), Snapchat (SNAP), and Twitter (TWTR). On a global scale, we believe these online ad platforms have yet to withstand the recent adverse impact of iOS and Android system updates. Also, many online marketers pull back their online ad expenditures due to temporary global supply-chain bottlenecks, labor shortages, and competitive pressures from TikTok and YouTube etc. As these fundamental forces ease in time, many of these online ad platforms should be able to experience major rebounds in sales, profits, and cash flows worldwide.

 

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