"Big Banks" Citigroup: The Chinese internet sector has performed the best so far this year, and competition in China's AI market is expected to intensify significantly next year

Citi released a report indicating that the Chinese internet sector has become the best-performing sector so far this year, with a cumulative return of 36.5%, significantly outperforming Southeast Asia (+18.3%), India (+17.6%), Japan (+16.8%), the United States (+16.2%), and South Korea (+12.8%). In comparison, during the same period, the South Korean Seoul Composite Index rose by 64%, the Hang Seng Index rose by 29%, the Nikkei Index rose by 26%, the S&P 500 rose by 15.8%, and the Indian Nifty 50 Index rose by 10.4%. From the above return rates, it can be seen that risk aversion is emerging in the Chinese, Japanese, and American markets, mainly due to profit-taking at the end of the year and portfolio rebalancing.

Although the debate over whether AI valuations are too high continues, Citi expects that due to geopolitical risks and AI supply chain issues, the valuations of Chinese internet companies will continue to be at a discount relative to their global peers. However, as the pace of AI adoption accelerates, competition among Chinese AI participants may significantly intensify by 2026, covering areas from AI cloud infrastructure and chatbots to various application scenarios, but it is expected that the monetization speed will still lag behind user traffic growth and behind global peers.

Citi's top picks for the first half of 2026 are core AI concept stocks Tencent (00700.HK) and Alibaba-W (09988.HK); travel service provider Trip.com (09961.HK) and NetEase-S (09999.HK), which have stable/anti-cyclical profit growth; cross-border business exposure Jitu Express (01519.HK); and gaming/AI application potential stock CENTURY HUATONG (002602.SZ)