CITIC SEC Internet Q2 Earnings Summary and Investment Outlook: AI Balances Investment and ROIC, Core Business Focuses on Earnings Resilience

CITIC SEC released a research report stating that since 2026Q2, the valuation of the Hang Seng Tech Index has remained range-bound at a low level, and the core pricing factors for the sector have shifted from the divergence in external risk appetite to market liquidity expectations, sector earnings resilience, and cash flow conditions. Looking ahead to 26H2, sector performance will still revolve around AI progress and the certainty of core business earnings. From an AI perspective, it is recommended to watch for catalysts from model iteration, agent penetration pace, application expansion, and commercialization realization at leading internet companies; from an industry perspective, it is recommended to focus on companies with relatively high earnings certainty and relatively good cash flow and shareholder returns. CITIC SEC's main views are as follows: Market review: Valuation range-bound at a low level, focus on profitability and cash flow conditions. In 2026Q2, the Hang Seng Tech/China Concept Internet Index cumulatively fell -3.8%/-13.9% (the Nasdaq Index rose +21.4% over the same period); from 2026Q3 to date (as of September 11), the Hang Seng Tech/China Concept Internet Index cumulatively changed -3.4%/+0.5% (the Nasdaq Index rose +0.5% over the same period). Since July, the core pricing drivers for the sector have shifted from the divergence in external risk appetite to market liquidity expectations, sector earnings realization, and cash flow conditions. As of September 11, the Hang Seng Tech Index NTM PE was 15.2x, close to one standard deviation below the historical mean, with valuation range-bound at a low level. Earnings review: Revenue grew steadily, while profit recovery diverged. On revenue, the combined revenue of major domestic internet companies in 26Q2 increased 5% year over year, with growth flat versus 26Q1. Among them, Meituan (+14% YoY), BOSS Zhipin (+14% YoY), and TENCENT (+11% YoY) achieved relatively good growth. On profit, the combined 26Q2 Non-GAAP net profit of major domestic internet companies fell -9% year over year, a marked narrowing from the -32% decline in 26Q1. Looking ahead to 26H2, internet companies' revenue is expected to maintain steady growth. According to Visible Alpha consensus estimates, the combined revenue of major internet companies in 26Q3/Q4 is expected to grow 8%/9% year over year, and profit recovery is expected to continue; according to Visible Alpha consensus estimates, the combined Non-GAAP net profit of major internet companies in 26Q3/Q4 is expected to grow 8%/37% year over year. AI progress: China's large models are accelerating their catch-up, balancing investment and ROIC. Since July, China's large models have accelerated iteration. According to Artificial Analysis, Kimi K3 and GLM5.3 approached the evaluation level of GPT-5.6 and Fable 5 with a time lag of about two months; the capabilities of models such as DeepSeek, Qwen, and Hunyuan have also continued to improve, with multiple domestic vendors entering the global first tier. In addition, in 26Q2, domestic and overseas cloud vendors all provided clearer and more substantial guidance on the ROIC of AI investment. According to Alibaba's earnings call, under the current average gross margin level of AI products, AI capex can pay back in about 3 years; according to TENCENT's earnings call, market demand for computing power is currently strong, and even if all computing power were rented externally to Tencent Cloud customers, it could generate considerable revenue. Looking ahead, under the AI narrative, it is recommended to watch for catalysts from model iteration, agent penetration pace, application expansion, and commercialization realization at leading internet companies. Industry perspective: Shareholder returns provide a margin of safety, while high earnings certainty provides upward drivers. On shareholder returns, as of August 31, the year-to-date buyback return rates of Joyy, NTES Cloud Music, BOSS Zhipin, and TME reached 5.9%/5.3%/3.8%/3.2%, and the year-to-date paid dividend return rates of Weibo, Vipshop, Joyy, and JD.com reached 9.1%/4.8%/3.9%/3.5%. In addition, Joyy raised its shareholder return plan for 2026-2028, while Full Truck Alliance and BOSS Zhipin maintained medium- to long-term shareholder return guidance, all providing a relatively strong margin of safety. On earnings, some companies are expected to see earnings inflection points thanks to product cycles, base effects, and other factors. Risk factors: Slower macroeconomic growth, leading to growth in e-commerce, gaming, advertising, and other industries falling short of expectations; valuation downside risk caused by disturbances in China-U.S. relations; market valuation center shifting downward due to liquidity easing falling short of expectations; earnings recovery falling short of expectations due to internet companies' cost reduction and efficiency improvement falling short of expectations; new business and new market expansion falling short of expectations, or investment losses exceeding expectations; investment strategies such as risks of core shareholder reductions; policy implementation progress falling short of expectations; increasingly intense competition.