Since the release of the R1 model by DeepSeek at the end of January, the Hang Seng Technology Index has risen by about 20%. As the influence of this &#34;domestic model light&#34; gradually expands, Morgan Stanley has refreshed its views on China's three tech giants, BAT.
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On February 16, Morgan Stanley strategy analyst Gary Yu and his team released a report stating that with the reduction in AI model training and inference costs, Tencent, Alibaba, and Baidu will all benefit.
Among the three companies, Morgan Stanley is most optimistic about Tencent, followed by Alibaba. Morgan Stanley maintains an &#34;Equal Weight&#34; (EW) rating on Alibaba and Baidu, but is very optimistic about Alibaba's high-end cloud computing business, while expressing concerns about Baidu's search business facing disruptions and monetization risks.
Specifically, Tencent remains Morgan Stanley's top choice, and the firm expects breakthroughs in Tencent's 2C AI applications to drive its stock price higher.
Morgan Stanley noted that since the release of the &#34;DeepSeek&#34; model, Tencent's stock price has risen by 22%, lagging behind Alibaba's 40%. However, as the market shifts its focus from the capabilities of large language models (LLMs) (benefiting Alibaba) to AI applications and monetization (benefiting Tencent), this trend may reverse.
Morgan Stanley added that currently, Tencent has already benefited from upgrades in AI-driven advertising technology, and in the future, the 2C (consumer market) may lead the way over the 2B (business market) in China.
Morgan Stanley maintains an &#34;Equal Weight&#34; rating on Alibaba but is optimistic about Alibaba's high-end cloud computing business.
Morgan Stanley stated that although Alibaba, as China's largest cloud service provider and a leading developer of open-source LLMs, benefits from the recent AI trend, the recent rebound in Alibaba's stock price has already factored in the upside potential of its cloud computing business.
In a baseline scenario, Morgan Stanley estimates that Alibaba's cloud computing revenue will grow by 18% in the fiscal year 2026/27, reaching RMB 163 billion (approximately USD 21 billion), with a cloud computing value of USD 64 billion (approximately USD 28 per share) by the fiscal year 2027.
In an optimistic scenario, Morgan Stanley estimates that Alibaba's cloud computing revenue will grow by 20%/25% in the fiscal year 2026/27, reaching RMB 179 billion (approximately USD 23 billion), with a cloud computing value of USD 93 billion (approximately USD 40 per share) by the fiscal year 2027.
As for Baidu, Morgan Stanley also maintains an &#34;Equal Weight&#34; rating. Morgan Stanley believes that although Baidu has a first-mover advantage in AI strategy, its core search business may be disrupted by generative AI and faces monetization risks, especially with increasing competition from Tencent and ByteDance

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Morgan Stanley stated that as the costs of AI model training and inference decrease, Tencent, Alibaba, and Baidu will all benefit. As the market's focus shifts from large model capabilities to AI applications and monetization, Morgan Stanley has given Tencent an overweight rating. The recent rebound in Alibaba's stock price has reflected the upward potential of its cloud computing business, while Baidu's core search business may face monetization risks due to the impact of generative AI

- Since the release of the DeepSeek R1 model at the end of January, the Hang Seng Tech Index has risen by approximately 20%.  
- Morgan Stanley analysts have revised their outlook on China's BAT trio, favoring Tencent for its potential in AI applications, while maintaining equal weight ratings for Alibaba and Baidu.  
- They project Alibaba's cloud computing revenue could grow significantly by 2026/27, but express concerns over Baidu's core search business facing competition and monetization risks.

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Morgan Stanley on BAT: "Overweight" Tencent, "Positive" on Alibaba Cloud, "Concerned" about Baidu Search