CITIC SEC: Internet companies accelerate their AI layout, contributing to the long-term valuation elasticity.

CITIC SEC released a research report stating that in September 2024, Tencent and Alibaba each held a digital ecosystem conference and Yunqi Conference, and Byte held the Winter Power Conference in December. At these conferences, they showcased the leading technological capabilities of Tencent Cloud, Alibaba Cloud, and Byte Cloud, their perception of trends in cloud computing and artificial intelligence, and the progress of their technology products in enabling industry digitization. Leading internet companies in China, with efficient capital investment, rich industry experience, and leading technological capabilities, are taking the lead in the era of generative AI, accelerating the evolution from consumer internet to industrial internet, and continuously enhancing their technological attributes. The report recommends ongoing monitoring of the technological strategies of top internet companies and the performance and valuation elasticity brought by cloud business. Key Points from CITIC SEC: Cloud Computing Market: The Chinese market maintains high growth, with industry giants leading the way. According to China Information and Communication Research Institute, the scale of China's cloud computing market reached 616.5 billion yuan in 2023 (YoY+35.5%), and with the innovation of cloud computing technology and the large-scale application of models, the institute predicts that China's cloud computing market will exceed 2.1 trillion yuan by 2027. In 2023, China's IaaS/PaaS/SaaS market sizes were 338.3/59.8/58.1 billion yuan respectively (YoY+38.5%/74.9%/23.1%), mainly benefiting from the expansion of public cloud services, the demand for AI development, and the increased penetration of SaaS in small and medium enterprises. AI has become a crucial engine for the new round of information technology transformation, and cloud services can significantly improve computational resource utilization and reduce costs. The trend of "cloud and intelligence integrated" is becoming more evident, with industry giants taking the lead. Microsoft and Amazon Clouds stably rank as the top two in the global market. According to IDC China, in 2024 H1, Aliyun/Huawei Cloud/China Telecom Cloud/China Mobile Cloud/Tencent Cloud held market shares of 25.8%/13.4%/13.2%/9.1%/8.5% in the public cloud IaaS market in China (YoY-4.1%/+0.2%/+1.0%/+0.1%/+0.4%). Alibaba Cloud: Building a globally-oriented full-stack AI technology capability and actively leading the development of open source projects. Alibaba Cloud has globally deployed product services and full-stack AI technology capabilities. According to the 2024 Alibaba Cloud Conference, they have: 1) Infrastructure level: Building AI-oriented infrastructure, including GPU-centered Pingtou server, HPN 7.0 high-performance network architecture, CPFS file storage, and providing comprehensive technical support around the model lifecycle. 2) Model level: Continuous improvement of Universal series with multi-modal and specialized capabilities; Alibaba Cloud Bank helps enterprises achieve flexible, efficient, and user-friendly API calls for large models, serving over 300,000 customers. 3) Application level: Focused on efficiency tools, with continuous iterations covering applications in programming (Universal Smart Code), real-time recording, reading assistance, PPT creation, video calls, and other scenarios. 4) Security level: Building security guarantees for the full lifecycle of large models, with features like digital watermarking and content security. 5) International level: According to the Alibaba Cloud official website, Alibaba Cloud operates a total of 89 data centers globally, supporting 30 cloud regions and serving over 4 million customers worldwide. Southeast Asia is a breakthrough for Alibaba Cloud's international expansion, and with the trend of Chinese companies going global, it is expected to see new developments. Tencent Cloud: Emphasizing the combination of products and application scenarios to make AI more practical. Tencent has successfully built a full-stack integrated innovation product system. According to the 2024 Tencent Digital Ecosystem Conference, they have launched: 1) Infrastructure level: The new "Tencent Cloud Intelligence" is fully online, laying out a full-stack "5T" basic software. 2) Model level: The formal launch of "Mixed Turbo," with hybrid models such as DiT (text-to-image), Vision (image-to-text), and HunyuanVideo (text-to-video) continuously improving multi-modal capabilities. 3) Tool level: Three PaaS products launched - "Big Model Knowledge Engine," "Big Model Image Creation Engine," and "Big Model Video Creation Engine" - to help develop high-quality and efficient solutions. 4) Application level: Over 700 products at Tencent have integrated with mixed models. For example, Tencent Cloud's AI Code Assistant covers over 50% of internal programmers, and the full range of large model products has been implemented in various industries like intelligent customer service and marketing. 5) Security level: Released Tencent Cloud Tianyu AIGC content risk control solution and other products to protect sensitive enterprise data. 6) International level: Tencent has extensive experience in international operations and has established over 3,200 global acceleration nodes covering 21 regions across five continents, serving 11,000 partners. In terms of localized services, Tencent Cloud's revenue in the Asia-Pacific region increased by more than 50% YoY, and in the Middle East region, revenue increased by as much as 85%. Byte Cloud (Volcano Cloud): Leveraging data accumulation as an advantage, accelerating development in the era of large models. Byte owns multiple social products such as Douyin, Toutiao, and Tiktok, which gives them a significant advantage in user data resources for consumer applications and actively expanding into B2B sectors. According to the 2024 Byte Winter Power Conference: 1) Model level: Douyuan's large model family has been fully upgraded, with visual understanding models having excellent recognition and inference abilities, priced at 0.003 yuan/thousand tokens, 85% lower than the industry average. The Pro universal model has been completely upgraded, aligning its capabilities with GPT-4o, and upgrades have been made to music generation models, 3D generation models, text-to-image models, etc. 2) Tool level: Tools like Volcano Ark, Button, and HiAgent help enterprise AI application development. Volcano Ark provides comprehensive capabilities such as model support, inference, evaluation, and a new online solution for large model memory and AI search and recommendation engines. 3) Application level: Significant increases in model call volumes and excellent application performance. According to the Volcano Engine Winter Power Conference 2024, the call volume for Douyin tokens has increased by 39% in information processing, customer service and sales, hardware assistants, and AI tools scenarios over the past three months.In daily life, education, academic work and other fields, it shows excellent performance.4) Safety Aspect: Volcano Engine Jeddak PCC and Security Intelligent Bodies released, creating end-to-end AI security solutions in the cloud. Comparison of large factories: Global full-stack layout, strategic focus varies, technology iteration accelerates. Alibaba Cloud, Tencent Cloud, and Byte Cloud all have a full-stack technology layout, targeting the global market with different strategic focuses, 1) Overall, Alibaba Cloud focuses on IaaS+PaaS construction, Tencent Cloud focuses on SaaS applications, and Byte actively seizes the opportunity of large models. 2) At the application level, Alibaba Cloud has launched a series of efficiency tools such as Tongyi Ling Code, real-time recording, and reading assistant; Tencent Cloud combines internal applications with large models and advocates empowering thousands of industries; Byte Bean Bag takes the lead in seizing C-end traffic. 3) At the model level, great efforts are being made to promote the integration of AI and cloud computing, and price competition continues. In May 2024, Byte Bean Bag launched its main model, priced at only 0.0008 yuan per thousand tokens; in September, Tencent Cloud and Alibaba Cloud successively launched more optimal "Hybrid Turbo" large models and newly upgraded Tongyi large models, with Hybrid Turbo prices halved and Tongyi series with the highest reduction of 85%. 4) Continuous increase in technological investment is expected to drive the development of the entire industry chain. According to the company's financial reports, in the first three quarters of 2024, Tencent/Alibaba Capex were 40.2/40.7 billion yuan respectively. 5) In the investment field, Tencent, Alibaba, and Byte continue to strengthen their technological attributes through acquisitions and mergers. According to IT Orange, since 2014, Tencent/Alibaba/Byte have completed 1535/935/223 investments respectively, with targets in the enterprise services sector being the top two investments for all three companies. 6) Performance valuation: Revenue and profit steadily increasing, likely to contribute to valuation elasticity. According to Tencent's ecosystem summit, Tencent Cloud continues to focus on self-developed products, partners with orders exceeding a million achieving double-digit growth, we expect Tencent Cloud's gross profit margin to continue to improve, gradually approaching profitability target. Alibaba Cloud remains committed to investing in AI, with expected double-digit growth in external customer revenue in FY2025H2, and EBITDA Margin is expected to be maintained at 8-9% or above in the future. Risk factors: Risks of macroeconomic fluctuations leading to lower-than-expected corporate IT spending; risks of AI core technology development and industry applications falling short of expectations; risks of continuous tightening of policy regulation in the technology field; risks of company strategic layout transformation; risks of continued intensification of industry competition; risks of geopolitical influences limiting overseas business development, etc.