China's internet sector is at a critical inflection point in 2024, buoyed by breakthroughs in large AI models such as DeepSeek and a wave of pro-growth domestic policies. As of May 9, tech giants Alibaba (9988.HK), Tencent (0700.HK), and Xiaomi (1810.HK) have posted year-to-date gains of 50%, 18.6%, and 48.8%, respectively. The China-focused internet ETF (KWEB) has raised over 14%, significantly outperforming major U.S. equity sector ETFs.
The week ahead, China’s tech heavyweights will begin reporting first-quarter earnings. Analysts expect JD.com, PDD Holdings, Meituan, Xiaomi, and Bilibili to all post double-digit year-over-year revenue growth. However, PDD’s Q1 profit is expected to dip slightly. Market expected the companies with a stronger domestic revenue focus may be better positioned to outperform.
Despite tariffs attention, Goldman Sachs indicates that top Chinese internet firms derive the majority of their revenue and profit from domestic markets. Their overseas business footprint is broadly diversified across the U.S., Europe, the Middle East, Latin America, and ASEAN. With the exception of PDD's Temu, exposure to U.S. markets remains limited—keeping single-region risk relatively contained. Still, China's recent announcement of a 34% tariff on all U.S. imports could impact AI-related capital expenditures at firms like Alibaba.
HSBC China notes that the current environment presents multiple structural opportunities for China's capital markets. First, foreign ownership—particularly from U.S. investors—remains relatively low, meaning the sector has faced limited historical selling pressure. Second, global capital is gradually rotating out of an overconcentration in U.S. equities. Breakthroughs in AI and other advanced technologies are helping reposition China’s tech sector as a strategic investment destination.
Notably, Chinese equities still trade at a valuation discount of more than 30% compared to other emerging markets. Domestic demand remains resilient, with consumption now driving 55% of the economy—an upside that markets may be underestimating.
Addressing concerns over potential delisting of U.S.-traded Chinese ADRs, a recent Morgan Stanley report pointed out that around 80% of the market cap of Chinese ADRs have already secured dual listings in Hong Kong. These ADRs account for approximately 25% of the MSCI China Index. As such, even in a worst-case scenario, the broader impact would likely be limited.
Following a technical correction in March, the sector’s median forward P/E has retreated to 12x—just a 30% premium over the 2022 trough during the height of delisting fears. Goldman Sachs estimates suggest that, with 10–15% earnings growth, major internet names still have a 34% upside to their 12-month price targets.
