China AI
The advent of generative AI technologies like ChatGPT has captured global attention, igniting imaginations about the profound ways they could reshape content creation, search, advertising, and e-commerce. We have talked about this before in the Daily Update. While enablers such as OpenAI and Nvidia have seen their valuations skyrocket, and whilst US internet companies are viewed as prime beneficiaries, many investors may be overlooking the potential impact this could have on China’s internet giants and the vast ecosystem in which they operate.
China has proven adept at commercializing transformative technologies and tailoring them for its massive user base at an unprecedented scale. This dynamic of adapting cutting-edge technologies for the unique needs and scale of the Chinese market could turbocharge the monetization of generative AI capabilities.
Firstly, let us look at how these companies are faring from a fundamental point of view – to make sure that they are first and foremost investable. Many leading China internet companies beat analyst estimates in their Q4 earnings, reflecting increased consumer activity around the Lunar (Chinese) New Year holiday. On average, Chinese Internet companies currently trade at a -40% discounted earnings multiple compared to their US-based peers. Many of these companies continue to repurchase shares and have an average buyback yield that is nearly 6%!
A well-known basket of Alibaba, Tencent, PDD, Meituan, JD, Baidu and others have a combined earnings per share (“EPS”) of 8x Amazon’s latest EPS, and their weighted average revenue growth year-on-year was more than 2x Amazon’s for Q4 ’23.
So, the “China” discount does not seem to be related to underlying earnings. What about the market opportunity relating to AI?
With a user base that dwarfs the entire populations of most countries (China had a total of 1.08 billion internet users as of 2023), unleashing generative AI’s potential across China’s internet landscape represents an immense commercialization opportunity. Focusing on Alibaba, and its significant strategic investment into Moonshot AI; a company focused on developing foundational Generative AI models. Moonshot recently announced its Kimi Chat which boasts the ability to handle up to 2 million characters in a single prompt, compared to Open-AI’s ChatGPT-4’s limit of 8,192 characters. This breakthrough in ultra-long prompt handling capacity enables Kimi Chat to process and respond to more complex and context-rich interactions, potentially unlocking novel solutions across various sectors.
Alibaba has also developed its own large language model called Tongyi Qianwen, which the company is currently using to enhance search and advertising on its e-commerce platforms. In a recent earnings call, Chairperson Joe Tsai said he sees strong potential for AI to “significantly enhance search conversion and advertising monetization.” for the e-commerce business. For all of Alibaba’s business lines, generative AI could massively improve customer service, sales processes, and marketing at an otherwise impossible scale, cutting certain operational costs substantially.
Whilst there are still many geopolitical and regulatory risk factors that we have not covered here, it seems on the surface that research and innovation as well as from a fundamental cash earnings perspective, many of China’s internet companies provide an attractive nascent opportunity versus their US peers.
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