CICC: The impact of AI on the Chinese internet industry is gradually becoming apparent. We recommend focusing on TENCENT (00700), paying attention to KUAISHOU-W (01024), and NTES-S (09999).

CFI released a research report stating that this year, under the influence of the AI wave, the valuations of domestic internet companies have been somewhat restored compared to the pessimistic mode of 2024, but recent changes in external tariffs have exacerbated this trend, leading to a slight decline in valuations. Overall, the bank believes that the current valuation of the domestic internet sector is still in a reasonable and low range, with a safety margin still present. In the face of external uncertainties, investing based on fundamentals in the past few years is still a relatively high certainty investment method. Regarding AI, the fundamental aspects and valuations of domestic internet companies are relatively matched, with the potential of AI more akin to an option value. If future AI applications demonstrate significant market potential, they may significantly enhance the growth space of related internet companies. As for AI investment, the investment intensity of domestic internet companies is relatively rational compared to leading tech companies in the United States, and overall the impact on profits is relatively controllable. In the fourth quarter of last year, the overall performance of the domestic internet industry was robust, with revenue generally meeting expectations and profits mostly exceeding expectations; companies like TENCENT(00700) disclosed large-scale capital expenditure plans, with cloud business revenue increasing due to the demand for AI computing power. However, looking ahead, companies are maintaining a cautiously optimistic attitude due to ongoing external macro uncertainties; furthermore, the depreciation associated with AI capital expenditures in the long term is expected to have varying degrees of impact on current profits. By industry review: (1) Advertising industry: In the fourth quarter of last year, overall online advertising market grew by 14% year-on-year, with e-commerce promotions driving demand, and AI technology gradually being applied in the optimization of ad material generation and delivery efficiency. (2) Gaming industry: In the fourth quarter of last year, the Chinese gaming market grew by 16% year-on-year, but fell by 5% seasonally, with Tencent's older games performing well during the Chinese New Year period. (3) Online recruitment industry: BOSS ZHIPIN-W(02076) saw a 15% year-on-year growth in revenue in the fourth quarter of last year, with post Chinese New Year demand in the recruitment market picking up, reaching a historical high in daily active users, with AI technology beginning to improve matching efficiency and audit efficacy in the recruitment field. The impact of AI on the internet industry is gradually becoming evident, mainly in the following five areas: (1) Model layer: Domestic internet companies are approaching international advanced levels in model capabilities, using a combination of self-development and open-source optimization and iteration strategies. (2) ToC (Consumer-oriented) application layer: AI Agent is becoming an important direction for future development, with companies like ByteDance and Tencent already beginning to build intelligent ecosystem bodies, with user volume for conversation Siasun Robot & Automation rapidly increasing. (3) ToB (Enterprise-facing) services: AI empowering productivity tools and cloud computing services, with products like Meitu Design Studio and KUAISHOU-W(01024) Keling AI achieving commercial breakthroughs, and the deep integration of cloud computing and AI driving revenue growth. (4) AI empowering existing businesses: Advertising, gaming, and other fields are becoming key areas for AI empowerment, with companies like Tencent, Kuaishou, and BIDU-SW(09888) introducing AI into ad systems to enhance precision targeting, and the application of AI in games significantly improving development efficiency and user experience. (5) Capital expenditure investment: Domestic internet companies are entering an AI investment cycle, with significantly increased capital expenditure, focusing on inference-side computing power to drive the transformation of AI technology from training to inference, in the long term, the bank believes that AI is expected to be a key driver of commercial growth for internet companies in the future. Looking ahead to 2025, CFI comprehensively considers valuation and fundamental certainty, as well as the potential layout of AI. The core recommendation is Tencent, with its gaming business in good condition, advertising business experiencing organic growth with the continued rise of video numbers, payments business turning positive in October, and potential incremental effects from macro influences and cooperation with BABA-W(09988), with valuation in a low position, strong shareholder return willingness and ability. Regarding AI, the bank believes that the core competitive advantage of Tencent in AI application lies in the WeChat ecosystem, expected to actively expand in AI search, Agent, and other directions. It is recommended to pay attention to Kuaishou, with its high certainty of profit growth in 2025, turning losses into profits overseas, domestic business growth, coupled with profit margin improvements, low valuation position, stabilized e-commerce market, and potential profit increment contributions from external cycle short dramas in 2025. As for AI, Keling is currently one of the world's leading video generation models, with mature application scenarios and commercial models, demonstrating strong growth momentum. In the long term, it is recommended to pay attention to NTES-S(09999), with NetEase currently in a historically undervalued range; CFI believes that NetEase has long-term content innovation capabilities in the gaming industry, and it may be worth further attention to its performance.