Spending on artificial intelligence gave some Chinese tech companies a boost in the first quarter, despite economic challenges. “The standout for this reporting season was the growth in cloud business for Alibaba and Baidu,” said Brian Tycangco, an analyst at Stansberry Research. Alibaba’s cloud revenue rose by 18% year on year, while Baidu’s AI cloud business grew by 42%. “At these rates of growth, cloud business is poised to become the second-largest business segment for both companies,” Tycangco noted.
Alibaba, Tencent, and JD.com also reported double-digit growth in marketing revenue, which they attributed to AI tools that more effectively targeted consumers. This trend signals a fundamental change in Chinese markets. “AI/Tech/New Economy are further gaining traction as equity market leaders,” Morgan Stanley’s chief China equity strategist Laura Wang said in a May 20 note.
Morgan Stanley analysts prefer Alibaba and Tencent over Baidu and iFlytek among popular names. They also favor Meituan, Meitu, and Trip.com over Kuaishou and JD.com. Among mainland China-listed companies, 68% mentioned AI in their 2024 annual reports, up from 43% in the first half of 2024, according to HSBC Qianhai Securities head of research Steven Sun.
The information technology sector saw earnings rise by 24.7% in the first quarter from a year ago due to improving AI penetration, making it one of the fastest-growing sectors. HSBC’s buy-rated pick is enterprise software and cybersecurity company Sangfor, listed in Shenzhen, with a price target of 143 yuan.
Chinese-developed DeepSeek surprised global investors with its ability to rival OpenAI’s ChatGPT while claiming a fraction of the development cost. Several Chinese companies have since released new AI tools for generating video or 3D models. China’s tech breakthroughs stem from its breadth of engineers, data, and vast social media and e-commerce ecosystem, as well as government support.
Listed Chinese stocks generate the majority of their revenue domestically, with only 3% U.S. revenue exposure. This structural improvement is expected to be less susceptible to the ongoing tariff dispute and overall macro challenges, making China an attractive destination for foreign investors.
