UBS: Chinese internet giants are actively increasing capital expenditures and intensifying investments in the AI sector

UBS Investment Bank's head of research for the Chinese internet industry, Fang Jincong, pointed out that since the beginning of this year, the China Internet ETF (KWEB) has risen by 37%, increasing by 5% so far this quarter, but earnings expectations have been downgraded, with most of the rise driven by valuation. The main reason for the downgrade in earnings expectations is due to e-commerce's investment in instant retail. However, major Chinese internet companies are actively increasing capital expenditures and investing more in the AI sector. The bank also sees the continuous development of domestic computing power, including in AI chip layers, system layers, and large model algorithms.

Fang Jincong stated that geopolitical uncertainties have made investors worry about whether chip supply will affect China's AI development, but the bank believes that capital expenditures are more demand-driven. Compared to overseas, Chinese internet companies pay more attention to GPU efficiency and utilization, and therefore will adjust their investment targets more quickly and flexibly based on changes in demand.

In addition, the bank believes that LLM/AI is expected to become a sustainable driving force for the growth of the cloud market, also bringing cross-selling opportunities for traditional businesses and the potential to build long-term ecosystems.

Regarding investments in instant retail, the bank has observed signs of short-term competition stabilizing, with industry transaction volume growth slowing down, and believes that with the conclusion of Double Eleven, the industry is expected to bottom out, with competition easing towards the end of the fourth quarter and gradually returning to normal