China Merchants Securities has reiterated its positive stance on the AI internet sector, maintaining a recommended rating.

Its top stock picks are Alibaba-W (ASX: 09988), Knowledge Atlas (ASX: 02513), Kuaishou-W (ASX: 01024), and JOYY Inc. (ASX: JOYY).

The firm also suggests monitoring undervalued companies such as TENCENT (ASX: 00700) and MINIMAX-WP (ASX: 00100), which it believes possess greater potential for valuation recovery.

With the acceleration of AI commercialization, the valuation of China's AI internet industry remains attractive.

The broker noted that following a reset in expectations, the performance of the Hang Seng Tech Index has lagged behind its first-quarter showing since the second quarter began this year.

Although valuations for the Chinese internet sector are still near historical lows, first-quarter earnings this year demonstrated robust profit resilience.

AI's Central Role

The report states that AI continues to be the central investment theme for China's internet industry and is developing rapidly.

Within this trend, commercialization in the business-to-business (B2B) segment is accelerating and gradually integrating into white-collar workflows.

Consumer-facing (B2C) commercialization is still in its early stages, with WeChat's AI Agent potentially serving as a significant catalyst in the second half of the year.

Key Developments to Watch

Model iteration and progress in domestic chip development are identified as crucial factors for change in the sector.