UOB Kay Hian
Date of Report: 2 September 2025
China’s Internet Sector in 2025: Surging Top-Line Growth Amid Margin Pressures and AI Investment

Executive Summary: Sector Update and Strategic Themes

China’s internet sector delivered robust top-line growth in 2Q25, fueled by aggressive AI monetization and expanding quick commerce initiatives. However, leading platforms face mounting margin pressure as they ramp up investments to defend market share in on-demand delivery and AI cloud services. This report provides a comprehensive breakdown of key companies, financial performance, and future guidance, offering investors a strategic lens on what’s driving the sector in 2025.

Quick Commerce War Intensifies: Impact on Alibaba, JD.com, Meituan

The battle for dominance in food delivery and instant retail hit a new peak in 2Q25, with Alibaba, JD.com, and Meituan investing heavily to capture market share.

• Alibaba’s quick commerce revenue increased 12% YoY to Rmb14.8b, boosting Taobao app DAUs by 20% YoY in 1QFY26.
• Meituan’s order growth underperformed (11% YoY vs. 15% expected), with forecasts for 3Q25 trimmed to 13% for food delivery and 33% for Instashopping.
• JD’s Food Delivery (FD) business is deeply embedded in its ecosystem, with the cross-selling rate rising to 40% in June.

Aggressive investments are expected to widen losses in the September quarter, with Alibaba, Meituan, and JD forecasted to report losses of –Rmb30b, –Rmb14b, and –Rmb15b, respectively—a sharp deterioration from the previous quarter.

AI-Powered Cloud Revenue: A New Growth Engine

AI-driven cloud services are now a central pillar for the leading internet companies.

• Alibaba’s cloud revenue growth surpassed expectations, supporting strong stock performance despite foreign chip constraints.
• Alibaba, Tencent, and Baidu Cloud posted YoY revenue growth of 26%, 20%, and 27% in 2Q25, with EBITA margins stable at 9%, 3%, and 11%.
• Alibaba’s 1QFY26 investment of Rmb38.6b is part of a Rmb380b three-year cloud and AI strategy.
• Baidu’s AI Cloud contributed 25% to Baidu Core’s revenue; Kling AI’s revenue hit Rmb250m in 2Q25 with a revised annual target of Rmb900m.

E-Commerce: Growth Momentum but Mixed Profitability

Core commerce businesses continued to deliver solid revenue growth in 2Q25:

• Alibaba: +10% YoY
• JD.com: +21% YoY
• Pinduoduo (PDD): +7% YoY

However, non-GAAP net profit growth was lackluster:

• Alibaba: –18% YoY
• JD.com: –49% YoY
• PDD: –5% YoY

The sector is forecasted to outpace total retail growth in 2025, driven by defensive execution against competition.

Peer Comparison: Valuation Snapshot

Company-by-Company Analysis and Outlook

Alibaba (9988 HK): Quick Commerce, AI, and Revenue Growth

• Target Price: HK\$170.00 (BUY)
• Annual quick commerce GMV target: Rmb1t within three years (incremental Rmb3t GMV vs. core Taobao-Tmall GMV of ~Rmb8t)
• Forecasts for 2025: Online retail growth 8.3% YoY vs. overall retail at 5%.
• 3Q25 guidance: Revenue growth 10%, non-GAAP net profit down 65% YoY.
• 2025 full-year: Revenue growth 4%, net profit down 36% YoY, trading at 20x FY26F PE.
• TTG (Taobao Tmall Group) to benefit from AI integration and improved take rates, with customer management revenue guided to hit Rmb55.5b in FY26.

JD.com (9618 HK): Ecosystem Synergy and Double-Digit Growth

• Target Price: HK\$166.00 (BUY)
• JD Retail’s 3Q25: Revenue and net profit both guided to double-digit growth (10% YoY).
• Group top-line growth expected to slightly outpace retail, driven by new business segments such as food delivery.
• 2025: Revenue growth 13%, net profit down 31% YoY.
• Cross-selling rate for FD hit 40% in June, with further improvement expected.

Pinduoduo (PDD US): Moderate Growth, Mixed Profitability

• Rating: HOLD
• 2025: Revenue growth 7%, net profit down 10% YoY.
• 3Q25: Revenue growth 9%, non-GAAP net profit up 13% YoY.
• 2026F PE: 10x

Tencent (700 HK): Gaming Strength and AI Integration

• Target Price: HK\$736.00 (BUY)
• Online gaming revenue (2Q25): +15% YoY; non-GAAP net profit +10% YoY.
• 3Q25 guidance: Revenue growth 12%, non-GAAP net profit up 8% YoY.
• Unique WeChat ecosystem and global gaming assets position Tencent as a top AI application beneficiary.
• Currently trades at 17x 2026F PE, below historical mean (25x).

NetEase (9999 HK): Defensive Play in Online Gaming

• Target Price: HK\$244.00 (BUY)
• 2Q25 revenue growth: 9% YoY; non-GAAP net profit +22% YoY.
• Gaming sector remains resilient, with deferred revenue growth at 9% YoY.

Baidu (9888 HK): Cloud Growth and Kling AI Expansion

• Rating: HOLD
• AI Cloud contributed 25% of Baidu Core’s revenue in 2Q25.
• Kling AI revised annual revenue target to Rmb900m, up from Rmb700m.
• 2025: Revenue growth 8%, net profit down 30% YoY.

Meituan (3690 HK): On-Demand Delivery and Margin Pressure

• Target Price: HK\$80.00 (SELL)
• On-demand order volume expected to accelerate to 9–10% YoY in 3Q25.
• Core local commerce EBIT likely to incur significant loss in 3Q25 due to heavy subsidy investments.
• New initiatives and other revenue growth guided at 17–18% YoY, dragged by Meituan Select.
• Operating loss for 3Q25: Rmb2.3b–2.4b.

Kuaishou (1024 HK): E-Commerce and AI Monetization

• Target Price: HK\$89.00 (BUY)
• 2Q25 revenue growth: 13.5% YoY, driven by e-commerce and Kling AI.
• Online marketing/other services/live-streaming revenue growth: 13%/37%/5% YoY.
• Gross margin expected to hold at 55% despite increased AI costs.
• Adjusted net profit for 3Q25: Rmb4.9b (+24% YoY), net margin 13.8%.
• 2025 full-year: Revenue growth 11–12% YoY, Kling AI revenue Rmb900m, capex rising to Rmb11–12b.

Trip.com (9961 HK): International Tourism Drives Growth

• Target Price: HK\$725.00 (BUY)
• 2Q25 revenue growth: 16% YoY; non-GAAP net profit +1% YoY.
• 3Q25 revenue guidance: 12–17% YoY growth to Rmb18.1b, mainly driven by outbound travel.
• Gross margin: Expected to contract by 2ppt to 80.5% in 3Q25, with AI integration supporting margin.
• International tourism revenue expected to grow 50% YoY for full-year 2025.

Tongcheng (780 HK): OTA Resilience and Margin Expansion

• Target Price: HK\$25.00 (BUY)
• 2Q25 revenue growth: 10% YoY; non-GAAP net profit +18% YoY.
• 3Q25 revenue guidance: 7–12% YoY to Rmb5.3b–5.6b.
• Adjusted net profit for 3Q25: Rmb1b–1.05b, with continued net margin growth.

Other Verticals: Property and Home Services

• Beike (KE Holdings): 3Q25 revenue guidance flattish or +2% YoY to Rmb22.5b–23.0b. Existing home GTV to grow mid-single digit, new home GTV to decline 15% YoY. Home renovation revenue flattish, home rental moderating.
• Kingsoft Cloud: 2Q25 revenue down 7% YoY; 3Q25 guidance for 26% YoY growth.

Sector Catalysts and Risks for Investors

• Catalysts: Supportive government policies, rising online retail penetration especially in less developed regions and younger demographics, ongoing technology and infrastructure improvements, and committed AI development boosting operational efficiency.
• Risks: Elevated user acquisition costs, intensifying competition, heavy investment in new retail and local services weighing on margins and ROE, and risk of slower-than-expected top-line growth.

Conclusion: Strategic Focus Amid Competitive Pressures

China’s internet sector in 2025 is defined by strong revenue momentum, aggressive investment in AI and cloud, and intensifying competition in instant delivery and e-commerce. While top-line growth is robust for most players, margin pressures remain a central concern. Investors should focus on companies with clear AI strategies, resilient gaming businesses, and diversified revenue streams to navigate the challenging yet opportunity-rich landscape ahead.