Not for redistribution without writenconsentofMorganStanleyMorganStanley;RESEARCHIDEAJanuary 18,202610:35PMGMTChina Internet|Asia PacificGaryYu2026 Dutlook: China's AlPathIs+8522848-6918Eddy Wang,CFABrighterEadyWang@rmorganstanley.co+8522239-7339YangLiuorganstanley.com+8522239-1911After the DeeoSeek moment last year, we see China's Al Path astebeccaXubrighter in 2026, driven by both supply and demand. Besides Alu@morganstanley.com+8522848-7359overseas expansion is another wav tonavigate macro,competitive, regulatory and geographical risks. Key OW: Tencent+8522239-1572organstanley.comBABA.PDD.TME:UW/EW:ID.BILL.KS.BIDU.Kathy ZhuyZhu@morganstanley.com+8523963-2618entialimport of Nvidia H200 (for training) and expansion of dormestic thip production cad ty for inferenchng). Demaond We expet reakthrough in agentio+8523963-1592tapabilities to drive a non-linear surge in consumer (2C) adoptions; our latest ChinTom TangCO Surveys also signal positive inflection in enterprise (2B) spending for the first+8523963-1860ime since 2H21 We are less concerned about Albubble iskin China given onudentCHINAINTERNETANDOTHERSERVICESrapex with highfocus on applications which are likely to vield betterROICIndustryViewAttractiveortant asmaturedomesticmarketfacetive/regulatoryrisks:Thisispertinent tocross-bordere-commerce(PDD)e (Meituan), ride share (Didi, Not Covered)that overseas marketsalreadyrnetcompaniesin2025.which isexpected toexpandin thenext2-3vearsand geopolitics remain thekevrisks4025hasalreadystarted toweighonindustry,emaybottom out but remain intense afterthe Statetiation: We secontinued disruption from ByteDanceices, cloud, music, Al, etc.), and expect step-upininvestments in2C Alapplicationsfrom ByteDance(Doubad), Alibaba (Qwen)Quark),and Tencent(WeChat/Yuanbao), Arecent antitrust probe into TCOMalsoreignited someregulatory concerns after a relative benign environment in 2023-25afonre Kav OW Tencent remains our TopPick (reslien2C Alanlications olav); BABA (best Alenabler play, cloud ahean valuations, Temu on tracdk to breakeven in 2026 but notithe oricel. T E (resient busineswith potental upside from the proposed(UW) (operating de-leveragefrom trade-in high base, elevated new businesse investments); BILI(EW) (low games vistblity, ridh valuations) Kuaishou (lukewagalready in the price); BIDU (EW)(Kunlunxin as near-termublic appearances
MorganStanley|nesencu,IDEAOrder of PreferenceExhibit1:OrderofPreference,170
MoraanStanley|meseancrIDEAExhibit2: Order of Preference (continued),
MorganStanley|aeseancrChina's AlPath-Brighter in 2026 Alchipset supply-improved: We expect improved supply ofAlchipsetsin2026frorH200 approval as well as increased chipset localization progress. H200 is considered a high-performing GPU widely sed in foundation model training which is currenty ireplaceable by domestic chipsets. Chinals Al enablers and adopters will benefit fromapotentialapproval ofH200 accessby theChinese government in2026 and we expect no,pushback from the regulatory side.,China Semiconductor team e...
