评估中国互联网行业估值底线与盈利下行敏感性

China Internet Assessing Valuation Floor Vs Earnings Downside Sensitivity CITI'S TAKE Alicia Yap, CFAAC+852-2501-2773alicia.yap@citi.comBrian Gong+852-2501-2747brian.gong@citi.com Thesignificant underperformance of the China Internet sector hasintensified, with the sector continuing as a source of funds for the global AIhardware rally. This sell-off, however, has created a compelling valuationopportunity that we believe, and hope is approaching a floor. Key playerslike PDD, YMM and Meituan are now trading near their five-year troughmultiples.Even after stress-testing for potential 10-30%downwardearnings revisions, valuations remain exceptionally attractive, particularlyon an ex-cash basis. With solid net cash positions and outstandingbuyback programs, we expect companies to accelerate their buyback pace, Nelson Cheungnelson.cheung@citi.com Underperformance magnifies further —We highlighted earlier in our 1Q26 Wrapand 2H26 outlook report about the underperforming of China internet sector as thesector has been treated as source of fund to trade the AI hardware names, the sectorcontinues to trader weaker over the past month with a negative YTD return at -24.0%, compared with Japan Internet -5.8%, the US’s -6.4%, India’s -14.4%, Korea’s-21.3%, SEA’s -29.2%. By contrast, KOSPI has risen +111.9%, Nikkei +43.8%, S&P500 +7.5%, while Nifty is down -8.2% and HSI -10.0%. For major large-cap Chinainternet names, Tencent has declined the least at -4.0% for the past 1 month while Valuation multiple —As shown in Figure 1 where we compare 1-year forward PE vsthe average of past 5 years and trough valuation in the past 5 tears, PDD, Meituan,Full Truck Alliance stand out with trading multiple close to the trough valuation at6.9x PE (vs 5-yr trough at 6.6x), 0.8x P/S (vs 0.8x) and 9.9x PE (vs 9.9x). On the ex-cash basis, PDD, Baidu and VIPS are trading at 2.7x, 2.8x, 2.2x 1-year forward PE. Earnings sensitivity —Another reason why China Internet sector has become thesource of funds is because the concern on earnings downside revision. Based on our10-30% downward earnings sensitivity, majority of companies screen out atextremely attractive valuation especially on ex-cash basis. For example, impliedtrading multiple for PDD would be 7.7x/8.6x/9.9x assuming 10%/20%/30% negativeearnings revision and on ex-cash basis, it would imply 3x/3.4x/3.9x, respectively.For TCOM, it would imply 11.3x/12.8x/14.6x or 6.8x/7.6x/8.7x on ex-cash basis Net cash and buyback program —Majority of China internet companies are atdecent net cash position with PDD at US$63bn or ~60% of current market cap.Baidu at US$27.9bn or 79% of market cap and NetEase at US$24.3bn or 33% ofmarket cap (figure 5). In terms of outstanding REPO, Baba still have US$19.1bn,Trip.com US$5bn, Baidu US$4.8bn, NetEase US$2.9bn and JD US$1.4bn. Webelieve companies will likely step up its buyback pace in coming weeks. See Appendix A-1 for Analyst Certification, Important Disclosures and Research Analyst Affiliations. Not for distribution in the People's Republic of China, excluding the Hong Kong Special Administrative Region and QualifiedForeign Institutional Investors. Valuation vs Earnings Sensitivity As we noted in our earlier 2H26 outlook report (link), in our view, during the AIevolution cycle, constrained compute power and high entry barriers in cloud andchip development are shifting the competitive advantage to companies with full-stack AI capabilities. Hence, companies that can navigate the challenges and Although we believe the hardware momentum is far from over, if past revolutionsand transformations prove true, the power of what AI can bring to humanity willultimately lead to demand for social connectivity, leisure, entertainment, and theconsumption of goods and services. After the capacity build-up catches up, online The compelling valuations and growth opportunities in specific companies areamplified by a sector-wide trend of robust free cash flow generation and growingcash balances, a financial strength the market appears to be overlooking. When In our view, companies with a strong core business, healthy and sustainableprofitability, and powerful cash flow generation are best positioned to navigate thevolatility of the AI evolution cycle. This resilience is further supported by an Companies Mentioned: Alibaba Group Holding (BABA.N; US$95.07; 1; 25 Jun 26; 16:00) | Autohome(ATHM.N; US$18.78; 2; 25 Jun 26; 16:00) | Baidu.com (BIDU.O; US$103.99; 1; 25Jun 26; 16:00) | Baozun (BZUN.O; US$2.76; 1; 25 Jun 26; 16:00) | Beijing KingsoftOffice Software (688111.SS; Rmb200.03; 1; 26 Jun 26; 15:00) | Bilibili (BILI.O;US$16.14; 1; 25 Jun 26; 16:00) | CaoCao (2643.HK; HK$21.0; 1H; 26 Jun 26; 16:10) |DiDi Global (DIDIY.PK; US$3.48; 1H; 25 Jun 26; 17:00) | Full Truck Alliance (YMM.N;US$7.54; 1H; 25 Jun 26; 16:00) | Grab Holdings Ltd (GRAB.O; US$3.46; 1; 25 Jun 26;16:00) | Hello Group Inc (MOMO.O; US$5.4; 2H; 25 Jun 26; 16:00) | iQIYI (IQ.O;US$0.96; 1; 25 Jun 26; 16: