China Securities Co., Ltd: Accelerating the Depth of AI Applications, Content Consumption Rebounds and Forms a Bottom

China Securities Co., Ltd. released a research report stating that they continue to be optimistic about the application of AI and content consumption in 2026. In terms of AI application, commercialization has accelerated over the past 25 years, and in 2026, the focus will be on the integration of AI with existing products. Platforms such as WeChat, TikTok, and Douyin are expected to become main traffic portals in the AI era, and there is potential for AI to enhance advertising revenue. Additionally, the international expansion of AI is expected to speed up, with a focus on seizing overseas markets with high product competitiveness and cost efficiency. In the gaming industry, economic conditions and profit margins continue to improve, with an increasing number of game approvals supporting future revenue. Companies like Tencent, NetEase, and miHoYo are releasing new games, and mid-sized developers have potential for innovation and channel expansion. In terms of content consumption, leading companies are accelerating their overseas expansion and enhancing store efficiency, while the entertainment market is transitioning from wild growth to quality integration. The music platform sector is being driven by volume and pricing, with live performances seeing increased popularity. The film and television industry is benefiting from policy support, with AI assisting in content innovation. China Securities Co., Ltd.'s main views include: AI Application: From waiting for hit products to accelerating commercialization In 2025, the key theme for AI applications was accelerating commercialization. Companies such as OpenAI shifted their focus from AGI to monetization, with OpenAI estimating a jump in ARR from $100 billion to $200 billion within 25 years. Other companies like Anthropic saw rapid growth in their ARR, with a focus on programming, search, and multimodal capabilities. Both domestic and international companies are experiencing rapid growth in token usage, indicating a promising future for AI commercialization. 1) AI + Existing products = New traffic entry points. Platforms like Tencent's WeChat have the potential to become agents, with over 1.4 billion monthly active users. ByteDance's Douyin and DouyinBeans have integrated AI search capabilities, and Alibaba's Taobao, Alipay, and Xpark are also expected to become AI traffic entry points. Additionally, companies like Douyin are likely to introduce a "Chinese version of Sora," with AI-generated images already being widely used. In the overseas market, Chinese AI products are expected to grow rapidly due to their high quality and cost-effectiveness. 2) Overseas expansion of AI is a key focus. Overseas consumers have a strong awareness of paid software, providing an opportunity for Chinese AI products to grow quickly. Companies such as Meitu are expected to accelerate their overseas marketing efforts during the North American holiday season. Additionally, companies like Kuaishou are likely to continue innovating their AI tools and platforms, driving further growth. Domestic AI companies like MiniMax are anticipated to enter the capital market, with MiniMax already generating over $70 million in revenue in 2024, mainly from the AI social product Talkie. 3) Overseas AI companies are also making progress in funding and commercialization, with a focus on companies like OpenAI and Anthropic. OpenAI is integrating ChatGPT into third-party applications to shape the application ecosystem of the AI era, while Anthropic is projected to reach $80 billion in revenue by 2028, driven by corporate demand for AI programming. Gaming: Economic conditions and profit margins continue to improve, with new games from Tencent, NetEase, and miHoYo creating opportunities for innovation 1) Quality supply continues to grow, targeting the growing segment of adult gamers. The gaming industry experienced a resurgence in growth in 2025, driven by both supply and demand factors. Looking ahead to 2026, the outlook for the gaming industry remains optimistic. The issuance of game approvals has increased, with 1,441 approvals issued from January to October of 2025, a 23% increase from the previous year. These approvals are expected to contribute to revenue growth in 2026 and beyond. In terms of player demographics, adult gamers are a strong segment, with average revenue per user (ARPU) seeing a 13% year-over-year increase in the first half of 2025. 2) In 2026, new games from Tencent, NetEase, and miHoYo are on the horizon, with a focus on innovative products and sustainable operations. In 2025, breakout games from companies like Giant and Giften, in addition to Tencent's Delta Force, indicated the potential for success among mid-sized gaming companies. Major players like Tencent, NetEase, and miHoYo are expected to release a rich lineup of new games in 2026. 3) The top five gaming companies in the A-share market are forecasted to double their revenue from 2020 to 2025, providing a solid foundation for long-term growth. The average net profit margin of gaming stocks in the Shenzhen Component Index increased by 49%, 104%, and 112% in the first three quarters of the year, reaching new highs since 23. 4) Online gaming communities and offline internet cafes continue to benefit from the high economic conditions. For example, XD INC's TapTap platform achieved record revenue of 1.01 billion RMB in the first half of the year, a 38% year-on-year increase. HuYa Live's revenue reached 1.15 billion RMB in the second quarter, showing a positive growth trend even during the off-peak season. Other companies like KaiYing saw a 65.3% year-on-year revenue increase in their Legend Box platform, along with partnerships with other leading companies in the gaming industry. 5) The integration of AI and gaming has led to increased cost efficiency and innovative product exploration. The overall R&D expense ratio of gaming companies decreased from 12% in the first quarter of 2023 to 10% in the second quarter of 2025, driven by optimization of personnel and AI-driven development practices. AI has empowered game development through multimodal generation and localized deployment of AI models and tools. As Google's Genie and Tencent's MixElement continue to evolve, AI-powered user-generated content (UGC) games are expected to become more widespread. Content Consumption: Growth in trend-driven consumption, music and film consumption, and the impact of IP The report divides new IP consumption into two main categories: trend-driven consumption, centered around artist IPs like POP MART, and ACG content IP-driven consumption, such as anime and gaming. The latter category, after years of rapid growth, is expected to transition from a phase of extensive supply growth and channel expansion to a period of consolidation in 2026. POP MART's growth potential remains strong, with room for further international expansion of its IPs and product categories. Music consumption: Online platforms benefit from volume-driven growth, while live performances continue to thrive. Despite challenges from new players like Qimishui Music, the report predicts that the mainstream form of music streaming will still be based on licensed and complete long-format audio content, rather than transitioning to a free-to-pay model like in the reading market. Demand for live performances remains high, with consumer spending increasing year-on-year. The recent relaxation of regulations for the entertainment industry in South Korea is expected to further support market growth. Looking ahead, core companies are expected to expand vertically and horizontally to capture incremental market opportunities, with potential for international expansion to tap into larger markets. Film and television: Product innovation, policy support, and a turnaround in the market Continuous product innovation, new genres of entertainment content, and advancements in AI video technology have led to increased market size. The development of AI video technology has given rise to new formats like animated dramas and micro-dramas, bolstering growth. In addition, group viewing has continued to evolve and expand under regularization and professionalization, with multiple revenue streams now available beyond donations, including embedded advertisements and fan-oriented content monetization. Looking ahead, companies across the industry are leveraging AI and IP to drive product innovation, with a strong focus on high-speed growth in the emerging entertainment content market. As policy measures like the "Radio and Television 21 Rules" support production companies, the industry is expected to emerge from the supply downturn, fueling market growth. Risks: Risks related to weak copyright protection measures, unclear intellectual property division, declining influence of IPs, disruptions in collaborations with IPs or celebrities, changing consumer preferences, increased competition, low willingness to pay for content, resistance to changes in consumer habits, governance risks related to affiliated companies, underperformance in content launches, slower-than-expected developments in generative AI technology, challenges in product development, delays in product launches, rising marketing costs, talent attrition, rising labor costs, regulatory risks, and underperformance in commercialization capabilities.