AI monetization is spreading. UBS shares some of its favorite China plays

UBS has identified Alibaba and Tencent as its top Chinese AI plays, citing their strong execution, accelerating AI monetization, and robust Q2 results, with Alibaba's U.S. shares up 83% and Tencent's Hong Kong shares up 54% year-to-date. The investment bank notes that these companies possess sufficient chip stockpiles, are developing domestic chip alternatives, and are significantly increasing AI-related capital expenditure—Alibaba by over 50% and Tencent by more than 100% to RMB 19.1 billion in Q2—reflecting growing confidence in AI's long-term potential, which UBS believes is not yet fully priced into the sector.

Analysis

UBS has designated Alibaba (BABA) and Tencent as its preferred Chinese artificial intelligence investments, identifying them as emerging leaders in a sector where growth prospects are not yet fully priced in. This view is supported by their significant market outperformance, with Alibaba's U.S.-listed shares gaining 83% and Tencent's Hong Kong shares rising 54% year-to-date, far exceeding rivals like Baidu (+36%) and JD.com (-3%). The companies are demonstrating tangible AI monetization, particularly noted in advertising and gaming sectors during the second quarter. Confidence in long-term AI potential is further evidenced by aggressive capital expenditure; Alibaba increased its AI-related capex by over 50% from its four-quarter average, while Tencent more than doubled its capex year-over-year to 19.1 billion yuan. Concerns regarding U.S. chip restrictions are currently mitigated, as UBS reports both firms have sufficient stockpiles for training purposes and are actively developing multiple domestic chip options, reducing reliance on foreign suppliers like Nvidia. Despite this strong AI focus, investors should note persistent risks in their core businesses, including intense e-commerce competition for Alibaba and lingering regulatory uncertainty for Tencent's gaming segment.

Key Decisions for Investors

• Investors seeking exposure to China's generative AI theme should consider prioritizing positions in Alibaba and Tencent, as they are demonstrating clear leadership and monetization capabilities that may not be fully reflected in their current valuations.
• Given the stark performance divergence, consider rotating out of underperforming Chinese internet names like JD.com and Meituan into the identified AI leaders to better capture the AI monetization trend.
• Closely monitor two key risk factors: the long-term viability of domestic chip solutions as US restrictions evolve, and company-specific headwinds such as e-commerce competition for Alibaba and gaming regulations for Tencent.