ZhaoYin International: Focus on the structural opportunities for valuation improvement in the Chinese internet software sector.

Guosen International released a research report stating that, based on the experience of market rotation and the development trends of technology stocks in both China and the United States, the valuation of Chinese internet companies may still have room for recovery: the Chinese internet and software sector is currently trading at 22x FY25EPE, which is significantly lower than the overseas internet and software sector (29x FY25EPE). In terms of profit growth, the domestic internet and software sector is expected to have an EPS growth rate of 17% in 2026, slightly slower than the growth rate of 21% in the overseas internet and software sector, but still attractive from the perspective of valuation compared to profit growth. Top Chinese internet companies have the potential to enhance internal efficiency and external competitiveness, and there is room for revaluation of the value of the industry chain investment portfolio. Key points from Guosen International: Looking ahead, the liquidity trend in the Chinese stock market (A+H market) continues to improve, and the narrative logic of Chinese AI is becoming more positive. Reviewing the trend of the US technology sector, the performance and valuation elasticity of the semiconductor and cloud infrastructure-related sectors were relatively higher in the previous period. As the valuation of the semiconductor sector fully reflects investors' optimistic expectations, coupled with the gradual commercialization of AI applications, the AI software application sector is expected to match the increase in the hardware sector in the medium to long term. The bank still sees long-term investment value in the Chinese and American internet and software sectors, and recommends focusing on Alibaba Group Holding Limited Sponsored ADR (BABA.US), Baidu Inc Sponsored ADR Class A (BIDU.US), Microsoft Corporation (MSFT.US), Tencent (00700) with strong growth in cloud business, and Kuaishou (01024) driven by AI advertising and cloud business growth. In addition, it is recommended to pay attention to Chinese and American software companies that have made substantial progress in AI monetization and still have room for valuation improvement, such as Palo Alto Networks (PANW.US), Datadog (DDOG.US), and KINGDEE INT'L (00268). The more positive narrative of AI is driving market enthusiasm for investment. The market has shown higher enthusiasm for investments related to Chinese AI, with the main driving events including: 1) In the second quarter of 2025, the revenue growth of cloud businesses of Chinese internet companies is generally better than market expectations, and is expected to continue to improve under increased demand; 2) Big model capabilities continue to iterate and upgrade, Baidu Inc Sponsored ADR Class A released the deep thinking model Luna X1.1 with significant improvements in factual accuracy, instruction compliance, and intelligence, while Alibaba Group Holding Limited Sponsored ADR released the next-generation basic model architecture Qwen3-Next, which helps the model achieve similar or slightly better performance with significantly lower training costs; 3) The market's attention to the capabilities of Chinese chip companies is increasing further (such as Baidu Inc Sponsored ADR Class A Kunlun chip), and starting to include relevant valuations. "News Broadcast" reported that Alibaba Group Holding Limited Sponsored ADR's latest research and development chip, PPU chip for artificial intelligence, has further boosted market sentiment, especially companies with a high "chip" content. AI's substantial progress in short-term performance realization may provide support for valuation levels. Two major dimensions to consider the commercialization progress of AI applications: 1) From the perspective of core business driving, AI has a significant impact on cloud computing and advertising business. In terms of cloud computing, driven by the demand for AI computing power, 2QFY25 Alibaba Group Holding Limited Sponsored ADR/Baidu Inc Sponsored ADR Class A/Azure/Alphabet Inc. Class C cloud computing revenues achieved a year-on-year growth of 26%/27%/39%/32%; in terms of advertising business, AI drives platform traffic growth and advertising ROI improvement, 2QFY25 Tencent/Kuaishou/Meta/Alphabet Inc. Class C advertising revenues achieved a positive year-on-year growth of 20%/13%/21%/12%. 2) From the perspective of independent AI monetization, the bank recommends focusing on commercialization of AI creative software. In 2QFY25, Kuaishou's Ke Ling AI revenue surpassed 250 million RMB, and the bank expects Ke Ling AI's full-year revenue for FY25 to reach 950 million RMB (about 1% of total revenue); for B-end, the bank recommends focusing on commercialization of enterprise AI intelligent agents. In 2QFY26, Salesforce's data cloud and AI business ARR exceeded 1.2 billion US dollars, with a 120% year-on-year growth and approximately 20% quarter-on-quarter growth. Since Agentforce was launched, the company has completed 12,500 related transactions, of which 6,000 were paid transactions.