The Chinese internet sector has had a ho-hum start in 2026, with the KWEB remaining flat year-to-date, Bernstein said in a report. AI progress continued to drive relative preferences within the sector, with BABA-W (09988.HK) outperforming due to the launch of AI agent service by its Tongyi Qianwen, while TENCENT (00700.HK) lagged behind.

The broker pointed out that the chatbot battle is pivotal, with China's top-notch internet platforms resorting to “red packet” subsidies to foster robot adoption. This supports the broker’s view that in the consumer-facing AI domain, model capability is only part of the success formula. Compared to the promotion of mobile payment wallets in 2015, the broker viewed that distributing cash to drive “search behavior” is a rather indirect method. It is best to reserve judgment until high-frequency data in the coming weeks reveals user reactions during and after the Spring Festival.

The regulatory temperature in the Chinese industry remains higher than the broker would like, with the broker previously mentioning a “yellow flag warning” in the regulatory cycle of the industry. Since then, Pinduoduo (PDD.US) and TRIP.COM-S (09961.HK) were investigated, and rumors of a VAT increase (though debunked) contributed to shaky sentiment.

On TENCENT, the broker opined that its AI investment returns support growth, but the chatbot business still needs improvement. TENCENT's year-to-date stock performance showed investor concern over AI model and chatbot development. The broker believed the recent “Yuanbao” red packet snafu reflects its internal dual-track AI development model. On the other hand, TENCENT continued to provide robust AI ROI through its advertising and gaming businesses.

In a nutshell, TENCENT's recent valuation downgrade is not without reason. However, the broker also recalled the case of Apple (AAPL.US), of which market cap returns to USD4 trillion, may be like Meta (META.US) that switches between “AI leader” and “AI laggard”. When the broker asked TENCENT's management for clues on resolving narrative headwinds, they stated that Hunyuan 2.0 was the first model launched after the AI development team restructuring, and the model iteration speed should accelerate thereafter.

But if the market's argument is that TENCENT's multiple will remain under pressure until AI model development remains a show-me story, 14-15x FY+1 PE on the broker’s estimates now stands near the lower end of the company’s historical range, and not far from trough levels in 2022-2023 when the sector faced, the broker viewed that top-down headwinds that were much more severe are difficult to ring-fence.
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AASTOCKS Financial News
Website: www.aastocks.com

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