Morgan Stanley: It is difficult to build an ecosystem for the "BeanPod" AI phone. Reiterates "overweight" ratings for TENCENT (00700), BABA-W (09988), and MEITU (01357).

Morgan Stanley released a report stating that, in terms of ByteDance's "Dou Bao" planning to launch a smartphone AI assistant, although the ideal ecosystem of "Dou Bao" looks rich, there are challenges in execution. The bank believes that application stocks are still the preferred choice for AI investment, reaffirming the "overweight" rating for TENCENT (00700), BABA-W (09988), and MEITU (01357). Yesterday, ByteDance released a video showcasing the new "Dou Bao" smartphone AI assistant, which has been integrated into ZTE Corporation's sample phone as the system. The "Dou Bao" smartphone AI assistant can read the user's screen, access smartphone applications, and perform complex tasks. This has raised concerns about potential loss of traffic entry for C-end applications. However, the bank believes that there are challenges in promoting the "Dou Bao" assistant. Major smartphone OEMs and super apps are more inclined to develop their own artificial intelligence assistants, rather than relying on ByteDance. The bank believes that super apps in China are more dominant. Morgan Stanley continues to be optimistic about the investment opportunities for Chinese applications in AI, including Tencent (best AI application agent), Alibaba Group Holding Limited Sponsored ADR (best AI infrastructure), and Meitu (AI multimodal beneficiary). The "Dou Bao" smartphone AI assistant is a deep-embedded smartphone system developed by ByteDance, and a video showcasing the "Dou Bao" AI assistant has been released. In the demonstration, the AI assistant displayed the following capabilities: (1) Interactive function: Users can activate the "Dou Bao" assistant through voice, headphones, or the AI side key on the phone. Double-clicking the AI side key will initiate a voice or video call with the AI assistant. The assistant can read the screen content in an overlay format. (2) Multimodal generation: Users can ask the assistant to complete simple photo editing tasks, such as removing backgrounds. (3) Phone agent: The assistant can access installed applications to complete tasks such as price comparison, ordering, restaurant reservations, remote vehicle control, and meeting scheduling. (4) Memory function: With user authorization, the "Dou Bao" assistant will read and store screen information in the local environment for personalized tasks. (5) Professional mode: In this mode, the assistant has stronger reasoning abilities and can complete complex tasks across applications, such as planning trips and booking tickets based on social media preferences. Morgan Stanley believes that there are challenges in promoting the above. The bank believes that OEM cooperation faces significant obstacles. The implementation of the "Dou Bao" assistant requires in-depth technical cooperation and commercial negotiations with different smartphone OEMs, as it involves modifications at the system level, redefining the value proposition of smartphones, and weakening the bargaining power of OEMs in the supply chain. As for major smartphone OEMs such as Apple Inc. (AAPL.US), Huawei, and XIAOMI-W (01810), they are more likely to have their own AI assistants rather than cooperate with ByteDance. The bank believes that the options for OEMs that ByteDance can cooperate with are very limited. In the Chinese market, the difficulty of establishing the "Dou Bao" ecosystem is significant. In terms of investment perspective, Morgan Stanley believes that application stocks are still the preferred choice for AI investment. Despite concerns in the market that the "Dou Bao" assistant may become a traffic entrance, weakening C-end applications, the bank still has confidence in Chinese applications. This is because Chinese super apps (such as WeChat, Taobao, MEITUAN-W (03690)) have highly concentrated traffic and are more dominant, tending to use their own AI assistants to ensure traffic.