The Chinese internet sector has grossed gains of 44.8% YTD, outperforming Southeast Asia (+24.7%), Japan (+21.9%), and the US (+19.2%), Citi said in a report. The driving factors included the easing of trade tariff uncertainties and regional capital flow rotation. As BABA-W (09988.HK)  +2.000 (+1.541%)    Short selling $3.57B; Ratio 21.402%   and TENCENT (00700.HK)  +13.000 (+2.194%)    Short selling $1.90B; Ratio 16.502%   demonstrated AI-driven positive multiplier effects, paired with accelerated AI adoption in industry verticals, the broker expected funds to shift in 2H25 from the “experience and service consumption” to stocks related to “AI and cloud computing”. Competition in food delivery and instant retail is expected to persist into 4Q25, while the gaming business is likely to benefit from new gameplay and sustained growth in user engagement.

The broker top picks included 1) Tencent (target price HKD735), Alibaba (target price USD187, HKD183) - core AI theme stocks; 2) Pinduoduo (PDD.US)      (target price USD168) - high beta players, 3) Trip.com (TCOM.US)      (target price USD85) and Full Truck Alliance (YMM.US)      (target price USD16), 4) ST HUATONG (002602.SZ)  +0.790 (+5.016%)   (target price RMB21).

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With the development of domestic AI technology in China propelling accelerated adoption by enterprises, the broker assumed that investors' focus in 2H25 will once again be on companies with AI themes. Capital flows will rotate from the leisure/ entertainment sector, which led in 1H25, to cloud infrastructure and advertising companies. Gaming stocks, due to strong user engagement, are expected to continue receiving support due to resilient profit.
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