UBS: Tencent can benefit from the new growth momentum driven by AI technological innovation and the improvement of its closed-loop ecosystem

According to the Zhitong Finance APP, UBS released a research report stating that, based on the latest information on the advertising trends in the Chinese market for the second quarter and beyond, the overall advertising market in mainland China is slightly weaker than expected, but the benefits of AI-related advertising are gradually becoming apparent. Online advertising in China is expected to grow by about 12% year-on-year in the second quarter, although this is higher than the overall consumption growth rate, it is lower than the previous expectations of industry experts, mainly due to trade uncertainties affecting merchants' confidence in advertising spending. The expected growth for the third quarter is further slowed to about 8%, due to factors including a high base, the impact of fast-moving consumer goods e-commerce subsidies on advertising budget flows, and a sluggish advertising sentiment in the fast-moving consumer goods and automotive industries.

The report points out that within the industry, highlights have emerged in areas such as short dramas, mini-games, local services, fintech, learning hardware, and 3C electronic products, while advertising in the automotive, e-commerce, and application game sectors is relatively weak. The advertising benefits brought by AI technology are beginning to show, which includes not only content generation but also the entire advertising cycle's strategy formulation, traffic acquisition, and post-effect evaluation, with an average increase in click-through rates and conversion rates of 5% to 15%, driving advertising prices to grow in the mid-single digits year-on-year. The cost reduction and efficiency improvement brought by AI are attracting more advertising budgets, with Tencent Holdings (00700) and Alibaba-W (09988) making significant progress in this area, while Kuaishou-W (01024) is also in a leading position based on its AI content generation technology.

UBS indicates that the advertising and e-commerce ecosystem is becoming more closed-loop, with platforms such as WeChat Mini Stores, Douyin, Kuaishou, and Bilibili-W (09626) having closed-loop transaction advertising prices about 1.5 times that of external advertising. The accumulation of good user commercial transaction data helps create more refined user profiles and long-term growth.

Regarding Tencent, its search business continues to see growth in daily active users, with WeChat search bringing new advertising revenue and user intent insights. The development of mini-programs and mini-stores promotes a closed-loop ecosystem. Upgrades in AI advertising technology enhance matching accuracy and user stickiness, with the expected advertising load of value-added services reaching 4.5% to 5% by the end of the year, indicating robust long-term growth potential.

In terms of recommended stocks, the firm's industry preference remains Tencent (core recommendation), and it believes that Kuaishou and Bilibili will have relative advantages in subsequent performance. Tencent particularly has multiple long-term growth drivers, as it is expected to outperform its peers due to improvements in search, mini-programs, value-added services, advertising technology, and further development of the search and closed-loop ecosystem.

UBS expects China's advertising market to grow by 10.2% year-on-year this year, with online advertising expected to grow by 10.7% year-on-year. It estimates that Tencent's advertising will grow by 17% year-on-year this year, while Alibaba and ByteDance are expected to see their advertising grow by 6.3% and 14.4% year-on-year, respectively. Kuaishou's advertising is expected to grow by 14% year-on-year this year, while Bilibili's advertising is expected to grow by 18.2% year-on-year