How do foreign investors view China's internet giants? UBS: European and emerging market long-term funds have shifted to a slight overweight, hedge funds are active, and Alibaba is the most 关注

With the gradual clarification of the policy environment and the rise of new technologies such as generative artificial intelligence, foreign investment interest in Chinese internet giants is warming up again.

The latest research report from UBS shows that long-term funds in Europe and emerging markets have shifted to a slight overweight in the Chinese internet sector, while hedge funds are also actively participating. Among them, Alibaba has become the most 关注的标的。

Three Factors Supporting Foreign Investment Confidence

The analyst team led by Kenneth Fong at UBS pointed out in the latest report that foreign investment attitudes towards Chinese internet giants are becoming more positive, mainly for three reasons:

First, the recent domestic policy has shown significant support for technology companies. UBS specifically mentioned that the recent symposium for private entrepreneurs has injected great confidence into the market.

Second, the rise of generative artificial intelligence has brought new growth points to the internet industry. UBS found in discussions with over 60 investors that the vast majority are focused on the long-term potential of AI rather than short-term macroeconomic fluctuations. Investors believe that this round of rebound in the internet sector is more structural rather than relying on cyclical rebounds from stimulus policies.

Finally, the valuation of the Chinese internet sector is also very attractive. UBS expects the price-to-earnings ratio (P/E) of the Chinese internet sector to be 14 times by 2025, while the P/E of US tech giants (excluding Tesla, the Mag 7) will reach 24 times during the same period. In contrast, the valuation of the Chinese internet sector offers better cost-effectiveness.

UBS's report also reveals changes in foreign capital allocation in the internet sector. Long-term funds in Europe and emerging markets have shifted from previous underweight or neutral positions to a slight overweight, indicating a renewed preference for the Chinese internet sector. Meanwhile, hedge funds are also actively participating, particularly focusing on large-cap companies.

However, global funds' interest in the Chinese internet sector remains relatively low, which may indicate significant upside potential in the future. UBS believes that as market sentiment further improves, global funds may gradually increase their allocation to the Chinese internet sector.

Alibaba - The Cheapest AI Giant

At the individual stock level, UBS's report shows that Alibaba is the most 关注的标的 among investors, accounting for about 50% of the discussion time. Investors mainly focus on three issues: the sustainability of customer management revenue (CMR) growth, the growth of cloud business and capital expenditures, and the upside potential in valuation.

UBS expects Alibaba's CMR growth to maintain a level of 7-8% in the coming quarters, mainly benefiting from service fee increases and the launch of new marketing tools. Meanwhile, Alibaba Cloud's revenue growth is expected to accelerate to 20-25%, but due to the time lag between AI capacity building and demand, EBITA profit margins may face pressure.

In terms of valuation, UBS believes that Alibaba remains one of the cheapest AI concept giants globally, and with the accelerated expansion of its cloud business, Alibaba's stock price in the best-case scenario could reach $185, more than 30% higher than the overnight closing price.

In addition to Alibaba, Tencent has also received widespread attention from investors. UBS believes that Tencent has significant upside potential due to its strong gaming business, the e-commerce potential of its WeChat mini-program store, and its ability to monetize AI. However, the risk of U.S. investment restrictions remains a major concern for long-term investors