China’s AI Market Thrives: Baidu, Alibaba, and Tencent Poised for Growth
China’s AI market is set for significant growth, with tech giants Baidu, Alibaba, and Tencent leading the way. According to analysts at capital markets and investment group CLSA, these companies are well-positioned to benefit from the lucrative potential of artificial intelligence.
The global AI market is estimated to reach $1 trillion by 2026, with generative AI driving productivity and innovation, contributing $100 billion to this figure. While the United States is expected to account for 55% of the growth, China is projected to become the world’s second-largest AI market with over 6% market share.
The foundation of AI development lies in computing power, and collectively, ByteDance, Tencent, Alibaba, and Baidu are the world’s second-largest buyers of AI chips, comprising 12% of the market. According to data from the International Data Corporation, Inspur, and Tsinghua University, China’s AI computing power is expected to surge eightfold by 2026. This growth will be driven primarily by AI cloud services.
CLSA analysts have identified Baidu, Alibaba, and Tencent as the cheapest AI plays that will lead China’s AI innovation. These companies are set to witness over 20% annual growth in their cloud components, as they move away from low-margin and highly customized projects. Alibaba, in particular, is noted for offering the best cloud infrastructure for large language models. The revenue of AliCloud, Alibaba’s cloud computing subsidiary, is expected to achieve a 20% three-year compound annual growth rate, while its international e-commerce division will experience accelerated growth.
CLSA has given buy calls for Alibaba, Baidu, and Tencent, with target prices reflecting significant upside potential. Alibaba has a buy call at a target price of $158, representing a 78.9% increase from its closing price of $88.30 on September 12. Baidu and Tencent have buy calls at target prices of $184 and 500 Hong Kong dollars ($63.81), indicating potential increases of 33.2% and 55.3% respectively. CLSA points out that sector profit is at a historical high, whereas valuation is at a historical low for these companies.
Alibaba, Baidu, and Tencent are currently trading at price-to-earnings ratios of 8.8x, 13.1x, and 15.6x respectively, which solely reflect the value of their traditional businesses. The analysts estimate Alibaba’s cloud business to be worth $94 billion, compared to $27 billion for Tencent and $18 billion for Baidu. These figures account for around 40% of Alibaba and Baidu’s market capitalization, and 10% of Tencent’s.
Overall, China’s AI market is thriving, driven by companies like Baidu, Alibaba, and Tencent. These tech giants are well-positioned to capitalize on the growing demand for artificial intelligence and cloud services. With their strong market presence and potential for innovation, they are set to play a significant role in shaping China’s AI landscape in the coming years.
CNBC’s Michael Bloom contributed to this report.
