中国互联网：第二重要的事情

China Internet: The second most important thing companies remains top of mind in investor discussions. But we think a meaningful turnmaynowbe athandforthesecond importantdriver of investorsentiment and consensusestimates.WethinkAlibaba,JD,andMeituanspentsomething likeRMB120bn combinedonquickcommercesinceQ2...moderationshouldhelpsharepriceperformancefromhere. +85221232659robin.zhu@bernsteinsg.com +8522123 2618charles.gou@bernsteinsg.com view hasbeenAlibaba's signallingof ahalving ofquick commerce losses in FY3/27Eversus FY3/26.Our sense is Alibaba continuesto favour over-rather thanunder-investment in AI. But the decline of LTM FCF to zero has likely enforced some toughdecisionsatthecompany.AlcapexhasconvertedtoincrementalAlicloudrevenueatarough3-to-1 ratio,andRMB4Obn redirectedawayfrom quick commerce in favour of Alcapex would theoretically help to drive c.7-8% of Alicloud revenue acceleration, all elseequal.All Otherlosses remain an important constraint onAlibaba's groupprofits-andvaluations anchored on group PE levels.But ongoing price increases should continue tohelpAlicoud economics.Better capitalallocationmayalsomean the marketgivesmorecredence to SOTP valuations. +8522123 2644minjoo.kang@bernsteinsg.com JD's renewedfocus onprofits should leavemore roomto run.JD'sprofits continueto look solid in spite of ongoing top-line headwinds lapping high electronics comps. Q1profitslook ahead of street expectations.Meanwhile,thecompanysignalling a renewedfocus on profitability may be more important. Assuming $1bn of buybacks this (e.g. halfthe remaining authorisation) implies c.6% total capital return yield at current prices. Easiercomps keep hopes for H2 re-acceleration alive. Meanwhile, suggestions that 2027E profitsmay exceed 2024 levels potentiallyleave the stock on sub-7xnext yearPE. Videogaming:arewedonewithAldisruptionfears?Project Geniecontinuestofeatureoccasionally in our discussions with investors,but our sense is globalgaming sentimenthas shown signs of stabilisation.New game approvals remains well lubricateddomestically,whileGoogle'sloweringof platformfeesbenefitsmobiledevelopers.Withexpectationsreset for 2026 growth, the focus on Tencent likely continues to revolve around the timingof its ownMuse Sparkmoment.NetEasegrowth should accelerate inacouple quarters asdeferredrevenuerecognitionnormalises...andwehopefullygetanAnantadate. ThebroaderAlquestion.Afterthepost-Q4washout,recent moves across US peersmay portenda period of better Al sentiment across our sector coverage.Reporting fromZ.ai and Minimax point to vertical increases in enterprise Al ARR... but the latest high-frequencydata wetrackcontinuesto argue againstthe pace oftop-funnel change amongconsumers (with the top Al chatbots still looking like search engine plus).We expect frontierintelligence to remain the arbiter of performance across the listed Al labs,though thedirection of P/ARRmultiples will be interesting to watch from current stratospheric levels -if better clarity across the large caps diminishes the“onlygame in town"argument. INVESTMENTIMPLICATIONS While the implications of exponential Al growth likely continues to be debated for our Internet sector coverage, we think thedirection offood deliveryandquick commerce investments arenear a turn.Accordingly,wethink there arereasons to behopeful that bettertimes are ahead forthe China Internet sector, aftera weak firstfewmonths of2026. In contrast with the ongoing"will they, won't they" debate surrounding more muscular regulatory action in food delivery andquickcommerce, we think decliningFCFgeneration forcing Alibaba to choosebetween strategic priorities represents the muchlikelykeeps some pressure on Meituan.But lower overall losses frees up capital tobe deployed towards Alicloud and broader Aldevelopment.High"All Other" losses wilikely continue to constrain PEbased valuations for Alibaba. But more investor-friendlycapital allocation should help on the margin. Across our sectorcoverage,we expect investorstoembrace JD'srenewedfocus onprofitability,andexpectlowerH22o26 comps to support hopes for growth re-acceleration.The e-commercemarket in China remains low growthand highlycompetitive...but JD'sshares look too cheapeven if 2027EEPSdoesn't getallthewayto2024 levels. Weremain constructive on video gaming,and have been encouraged by investors backing away from peak Project Genie fear.That said, inflections in Tencent and NetEase's shares likely depend on Al breakthroughs -and pipeline surprises-respectively. Wehave updated our price targets for Tencent and JD.The formerisbased on lowerearnings estimates toreflect higher Alspend, multiplied by an unchanged 2Ox FY+1 PE multiple, while the latter reflects an unchanged 9x FY+1 (e.g. quarter 5-8) PEmultiple,incorporatinghigherearningsestimatesintheouteryearsasthecompanyprioritisesprofitability EXHIBIT1:Asian Internet valuationcomparison Wewritea regularlook-back after every quarter,to tryto summarise ourtakeawaysfrom reporting by