Daihua Jixian: AI cloud business is the primary sub-market for China's internet, with Alibaba-W as the top choice

Zhitong
2026.05.08 03:42

Daiwa Capital Markets released a research report stating that AI cloud business is the preferred sub-sector of China's internet, recommending Alibaba-W. Although Tencent's short-term profit margins may be diluted due to AI investments, its core cash flow is strong, and long-term growth prospects are good. In the next six to twelve months, focus on LLM competition, cloud revenue growth, AI intelligent applications, and commercialization potential. Maintain "Buy" ratings for Alibaba, Tencent, and Baidu, with target prices of HKD 192, HKD 728, and HKD 170, respectively

According to the Zhitong Finance APP, Daiwa Capital Markets has released a research report stating that against the backdrop of intensified competition in China's large language models (LLM), the rise of agent-based AI and AI super applications, the demand for "tokens" continues to grow strongly. The adoption of enterprise AI is driving improvements in cloud pricing capabilities, increased use of AI agents, and the expansion of consumer AI assistants. The firm still views AI cloud as the preferred sub-sector in China's internet sector and recommends Alibaba-W (09988) as a core investment.

In the next six to twelve months, the firm is focusing on AI narratives that include: (1) the evolution of LLM competition, (2) accelerated growth in cloud revenue and margin expansion (accompanied by price increases), (3) the launch of super applications based on AI agents, and (4) the commercialization potential of leading LLMs in vertical fields. The firm maintains a "Buy" rating on Alibaba with a target price of HKD 192.

Since the beginning of this year, competition has significantly intensified with the rapid iterations of major players such as DeepSeek's open-source V4, Alibaba (Tongyi Qianwen), Tencent (Hunyuan), Kimi, MiniMax-W (00100), ChatGPT 5.5, and Anthropic Mythos. The firm maintains a "Buy" rating on Tencent Holdings (00700) with a target price of HKD 728 and reiterates a "Buy" rating on Baidu Group-SW (09888) with a target price of HKD 170.

Evolution of industry structure and commercialization paths: The strong performance of independent AI players in coding and agent-based application scenarios, coupled with rapid growth in annual recurring revenue (ARR), indicates that the pricing power of leading models is improving. At the same time, newcomers like Xiaomi Group-W (01810) are lowering barriers and narrowing performance gaps through distillation technology and open-source architectures, raising market concerns about industry fragmentation/integration and the long-term profitability of API/"token" models. In response, major platforms have adjusted their strategies: Alibaba has restructured "Tongyi Qianwen" to align it with cloud and chip stack synergies and enhance agent-based and coding capabilities; Tencent has accelerated internal restructuring, talent retention, and the launch of agent-based products (including WeChat integration) to narrow the gap.

The firm notes that market concerns about the return on AI capital expenditures are rising, with Chinese tech giants increasing investments in 2026; however, the firm believes that China's hyperscale cloud service providers have greater flexibility, with capital expenditure intensity at about 60% of operating cash flow, lower than the approximately 90% of their U.S. counterparts, and a healthy net cash position. This supports continued investment (Alibaba: capital expenditure of RMB 180 billion by fiscal year 2027; Tencent's capital expenditure of RMB 100 billion in 2026). Therefore, the firm expects stricter control over loss-making businesses such as instant retail this year to support continued growth of over 40% in cloud services.

Regarding the impact on Baidu, Alibaba, and Tencent, Alibaba Cloud's "Bailian" platform reflects this trend, with "token" consumption increasing approximately sixfold year-on-year in the first quarter of 2026. In response, major cloud providers have begun to raise AI-related pricing. Some GPU instance prices on Alibaba Cloud have increased by up to 34%, while Baidu AI Cloud has raised service prices by 5% to 30%, and Tencent Cloud has increased the pricing of its Hunyuan model The bank believes that these measures are demand-driven, reflecting the acceleration of token usage and the tight supply of computing power. More importantly, this marks a shift in the industry from deflationary competition to a more rational pricing environment, with improved commercialization visibility.

Daiwa Capital Markets pointed out that Tencent's short-term profit margins may be diluted due to AI investments, but with strong core cash flow, upcoming model upgrades, and the integration of agency functions within its ecosystem, Tencent is well-positioned for long-term growth. The bank sees upside potential in the adoption and experimentation of AI applications and predicts that by 2026, the revenue growth for Alibaba Cloud, Baidu Cloud, and Tencent Cloud will be 40%, 36%, and 22%, respectively

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