UBS: China’s technology industry is entering a new phase

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Author | Zhou Zhiyu

Editor | Zhang Xiaoling

China's internet investors in 2025 may be experiencing a certain division. The China Concept Internet Index (KWEB) is surging ahead with a 30% gain so far this year, but the giants' financial reports are telling a story of profit pressure. Is the market celebrating the grand narrative of AI, or ignoring the harsh realities of the "food delivery wars" and profit "involution"?

At a recent UBS Securities A-Share seminar, analysts Fang Jincong and Xiong Wei gave Wallstreetcn a deep analysis of the two forces driving the market. Between the grand narrative of AI and the competition at hand, how much further can the internet rally go?

UBS points out that the development of AI in China is not a capital frenzy, but a pragmatic path focused on efficiency and application.

Technically, UBS Securities China Internet Industry Analyst Xiong Wei points out that the intelligence gap between Chinese and US large models is steadily narrowing, especially in multimodal fields such as video generation, where Chinese models have shown global competitiveness. More importantly, model iteration is significantly bringing down costs and paving the way for widespread AI adoption.

The market’s main worry about chip supply is seen by UBS as “controllable.” Leading companies are actively responding with a combination of inventory reserves, software optimization, and even domestic alternatives. Compared with US peers, Chinese companies are more prudent in capital expenditure, emphasizing practical needs and the utilization rate of GPUs. Despite the complex external environment, China’s internet giants have maintained their full-year capex outlook, indicating firm commitment to their AI strategy.

However, a firm commitment to investment does not mean reckless monetization. Currently, AI's primary role in most Chinese companies is as a tool for “cost reduction and efficiency improvement”. Whether improving R&D efficiency or optimizing content production, its value has already begun to show at the profit level in financial reports.

In contrast, direct commercialization is much slower and remains at a “very early stage.” Nevertheless, two clear monetization paths have emerged.

The first is through cloud services, where strong AI demand has become a sustainable driver for cloud business growth. Cloud vendors are seizing this to cross-sell higher-margin data services, building ecosystems and customer stickiness. The other is advertising, where large models are profoundly improving ad tech, from more accurate user analysis to more efficient creative generation. AI’s effect in boosting advertiser ROI has already been validated by major media platforms in both China and the US.

As for the much-anticipated “ultimate form”—AI agents—UBS believes that while they are key to long-term monetization, development is still in early stages. It is the enterprise-level and vertical agents, where willingness to pay and workflows are clearer, that are most likely to break through first.

When we shift our attention from AI’s future back to the present of the internet, a much more brutal competition unfolds.

Fang Jincong, Head of China Internet Research at UBS Investment Bank, puts it bluntly: The rise in share prices so far this year is mainly driven by valuations, not fundamentals. Another distinct phenomenon in the market is that funds are flowing from large caps to more certain vertical sectors, with mid-to-small cap stocks in “gaming, recruitment, tourism, music” far outperforming the giants.

The “real battlefield” of the internet is first and foremost the scorched-earth war in instant retail. The subsidy war led by food delivery platforms is a “double-edged sword”—while raising the industry ceiling and penetrating lower-tier cities, it also squeezes merchant profits and cultivates users’ low-price habits, laying hidden risks for the industry’s long-term profitability.

In sharp contrast to the brutal alley fights of instant retail is a quiet strategic shift taking place in the gaming industry.

Compared with betting huge sums on a potentially unsuccessful blockbuster, game companies are becoming more pragmatic, tending to direct resources toward the operation of mature, long-lifecycle "evergreen games."

In the broader consumer sector, there is a clear divergence. Physical retail is weak, but emotional consumption such as gaming and music remains resilient.

Online retail also continues to outperform offline, thanks to ever-smarter operational tools on e-commerce platforms—such as using dynamic coupons to accurately improve conversion rates.

Faced with AI’s promising future and the internet’s harsh reality, what should investors do? UBS’s answer: seek certainty.

Fang Jincong clearly states that among large internet stocks, he prefers Hong Kong stocks. When selecting sub-sectors, earnings visibility is the primary criterion. Therefore, the cash-burning e-commerce sector warrants caution. He favors sectors with clear earnings prospects and stable competition patterns, such as gaming with “evergreen” strategies, tourism with clear online trends, and short video platforms that can effectively combine AI with massive user scenarios.

As for the very popular A-share AI chip companies, Fang Jincong thinks that despite their high P/E ratios, it is simplistic to call them a “bubble.” Their high valuations are supported by scarcity, strong performance growth, and surging market demand.

Overall, in an environment where policy continues to turn favorable (such as relaxed game license approvals) and cross-border e-commerce may rebound in the second half as tariff issues clarify, China’s tech industry is entering a new stage.

The golden age of rough, unchecked growth is over, and the market no longer pays solely for stories of user growth. The grand narrative of AI must be grounded in real commercial value, while the intense battle for existing market share tests every player’s ability to profit and their strategic determination.

As highlighted by UBS, under this feast driven by valuation, the true winners will be those able to find the firmest profit anchor in the interweaving of dreams and reality.

Risk Warning and DisclaimerThe market involves risk, investment must be cautious. This article does not constitute personal investment advice, and does not take into account any user’s individual investment goals, financial status, or needs. Users should consider whether any opinion, viewpoint, or conclusion in this article is applicable to their specific situation. Investments made based on this article are at your own risk. ```