UOB Kay Hian has released a research report stating that, against the backdrop of intensifying competition in China's large language models (LLMs), the rise of agentic AI, and the emergence of AI super-apps, demand for "token" usage continues to show strong growth. The report highlights that enterprise AI adoption is driving improved cloud pricing power, the use of AI agents is increasing, and consumer AI assistants are expanding. Consequently, the firm continues to view the AI cloud sector as the preferred segment within China's internet space and names Alibaba-W (09988) as its core recommendation. Over the next six to twelve months, the firm's key AI narratives to watch include: (1) the evolution of LLM competition, (2) accelerated cloud revenue growth and margin expansion (accompanied by price increases), (3) the launch of agent-based AI super-apps, and (4) the commercial potential of leading vertical LLMs. UOB Kay Hian expressed a preference for Alibaba, maintaining a "Buy" rating and a target price of HK$192.

Competition has intensified significantly this year with the open-sourcing of DeepSeek V4 and rapid iterations from major players including Alibaba (Tongyi Qianwen), Tencent (Hunyuan), Moonshot AI (Kimi), MiniMax-W (00100), ChatGPT 5.5, and Anthropic Mythos. The firm maintains a "Buy" rating on Tencent Holdings (00700) with a target price of HK$728 and reaffirms a "Buy" rating on Baidu Group-SW (09888) with a target price of HK$170.

Regarding industry structure and commercialization pathways, the strong performance of independent AI players in coding and agentic application scenarios, coupled with rapid growth in annual recurring revenue (ARR), indicates improving pricing power for leading models. Simultaneously, new entrants like Xiaomi Group-W (01810) are lowering barriers and narrowing performance gaps through techniques like distillation and open-source architectures, raising market concerns about industry fragmentation/consolidation and the long-term profitability of the API/"token" model. In response, major platforms have adjusted their strategies: Alibaba has reorganized "Tongyi Qianwen" to better synergize with its cloud/chip stack and strengthened its agentic and coding capabilities; Tencent is accelerating internal reorganization, talent retention, and the launch of agentic products, including integration with WeChat, to close the gap.

The report notes rising market concerns over the return on AI capital expenditure, with Chinese tech giants expected to increase investments into 2026. However, UOB Kay Hian believes Chinese hyperscale cloud providers have greater flexibility, with capital expenditure intensity at approximately 60% of operating cash flow, lower than the roughly 90% for US peers, and strong net cash positions. This supports continued investment (Alibaba: up to RMB 180 billion in capex by fiscal 2027; Tencent: RMB 100 billion capex in 2026). Therefore, the firm expects stricter cost control on loss-making businesses, such as instant commerce, this year to support sustained cloud growth exceeding 40%.

Regarding the impact on Baidu, Alibaba, and Tencent, Alibaba Cloud's "Bailian" platform reflects this trend, with token consumption growing approximately sixfold year-on-year in the first quarter of 2026. In response, major cloud providers have begun raising prices for AI-related services. Alibaba Cloud increased prices for some GPU instances by up to 34%, Baidu AI Cloud raised prices for some services by 5% to 30%, and Tencent Cloud increased pricing for its Hunyuan model. UOB Kay Hian views these moves as demand-driven, reflecting accelerating token usage and tight computing power supply. More importantly, this signals a shift from deflationary competition towards a more rational pricing environment, with improving commercial visibility.

UOB Kay Hian indicated that while Tencent's short-term margins may be diluted by AI investments, its strong core cash flow, upcoming model upgrades, and integration of agentic features into its ecosystem position it well for long-term growth. The firm sees upside potential in AI application adoption and experimentation and forecasts 2026 revenue growth of 40% for Alibaba Cloud, 36% for Baidu Cloud, and 22% for Tencent Cloud.