Spending on artificial intelligence is providing a significant boost to some of China’s largest tech companies, helping them navigate economic headwinds. This trend highlights AI’s increasing importance as a core driver for revenue growth, particularly in cloud computing and digital marketing segments. Analysts see this as a key factor potentially reshaping market leadership in China.
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Cloud Business Soars on AI Investment
Cloud computing stands out as a primary beneficiary of AI spending. Alibaba reported an 18% year-on-year increase in cloud revenue in the recent quarter, while Baidu saw its AI cloud business grow by an impressive 42%.
Brian Tycangco, an analyst at Stansberry Research, noted, “The standout for this [first quarter] reporting season was the growth in cloud business for Alibaba and Baidu.” He added that at these growth rates, cloud is “poised to become the 2nd largest business segment for both companies.” More importantly, Tycangco believes cloud will become the foundation for a return to higher growth rates after several years of more modest expansion.
AI Enhances Marketing Efficiency and Drives Revenue
Beyond cloud services, AI tools are also contributing to revenue growth by improving targeting and efficiency in digital marketing. Alibaba, Tencent, and JD.com all reported double-digit growth in marketing revenue, attributing this strength partly to AI capabilities.
This widespread impact of AI signals a fundamental shift in the Chinese market landscape. According to Morgan Stanley’s chief China equity strategist, Laura Wang, AI, Tech, and the New Economy are “further gaining traction as equity market leaders.” She believes a “new generation of equity market leaders is forming in these sectors,” succeeding the previous dominance of consumer and internet stocks over the past five years.
Analyst Picks: Spotting AI-Focused Opportunities
Investment firms are identifying specific companies positioned to benefit from the AI surge. Morgan Stanley highlighted several AI-related stocks with potential upside. Among those rated overweight in Hong Kong with over 50% expected upside as of May 19, they included:
- Gushengtang: A traditional Chinese medicine healthcare company utilizing AI to train models for an “AI physician assistant.” The company reported a 12.7% increase in customer visits in the first quarter.
- Bairong: This company provides cloud-based AI services primarily to state-owned banks and financial institutions. Alibaba’s Taobao and Tmall platforms reportedly use Bairong’s AI models for evaluating consumer purchasing power.
When considering more widely known names, Morgan Stanley analysts expressed a preference for Alibaba and Tencent over Baidu and iFlytek. They also favored Meituan, Meitu, and Trip.com compared to Kuaishou and JD.com.
Meanwhile, HSBC Qianhai Securities pointed to the broader trend of AI adoption across industries. Their head of research, Steven Sun, noted that 68% of mainland China-listed companies mentioned AI in their 2024 annual reports, a significant jump from 43% in the first half of 2024. This increased mention reflects growing strategic focus on AI.
HSBC also observed a slight upward revision in consensus capital expenditure forecasts for major cloud service providers following their first-quarter results, suggesting continued optimism about their AI businesses. The information technology sector, benefiting from increased AI penetration, saw its earnings rise by 24.7% year-on-year in the first quarter, making it one of the fastest-growing sectors, according to HSBC.
Among HSBC’s buy-rated picks is Sangfor, an enterprise software and cybersecurity company listed in Shenzhen. HSBC has a price target of 143 yuan for Sangfor, believing that accelerating AI adoption will help drive its earnings growth.
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China’s AI Innovation and Resilience
China is also making significant strides in AI innovation, with locally developed large language models like DeepSeek surprising global investors with their capabilities and relatively lower development costs. Several Chinese companies have recently released new AI tools focused on generating video and 3D models.
Analysts attribute China’s tech breakthroughs to its vast pool of engineers, extensive data resources from social media and e-commerce ecosystems, and government support that accelerates technology adoption.
Importantly, this structural improvement driven by AI is seen as potentially less vulnerable to ongoing trade disputes and broader macroeconomic challenges. Morgan Stanley analysts noted that this resilience is crucial for attracting foreign investors looking for long-term commitments, as they find unique companies exclusively available in China, despite the overall macroeconomic slowdown. Listed Chinese stocks primarily generate revenue domestically, with limited exposure (around 3%) to the U.S. market.
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The Takeaway: AI as a Key Growth Engine
The latest earnings reports confirm that AI is not just a buzzword but a tangible growth driver for leading Chinese tech companies. The significant expansion in cloud businesses, fueled by AI investments, and the improved performance in marketing segments underscore AI’s transformative power.
As AI penetration deepens across industries and domestic innovation accelerates, this trend positions AI-focused companies as potential leaders in the Chinese equity market, potentially offering a degree of insulation from external pressures. Investors are closely watching how this AI-driven momentum continues to unfold.
