CLSA thinks China could emerge as the second-largest artificial intelligence market, and the firm is eyeing a tranche of stocks to play the growth. In a Tuesday research note, CLSA analysts led by managing director Elinor Leung noted the emergence of a “global AI race with lucrative potential” that has yet to fully play out in China. The U.S. has so far been the dominant market for AI. The explosion of investor excitement over AI in the U.S. has been driven by the likes of chipmaker Nvidia and Microsoft , with the latter benefiting from an investment in ChatGPT-developer OpenAI. Google-parent Alphabet quickly followed suit with its own large-language model, Bard. Enthusiasm over AI propelled Wall Street throughout the first half of the year, and helped push Nvidia to a $1 trillion market capitalization . But the tide could soon shift, according to Leung. “While the USA is a strong leader, China is putting up a fight and we believe it will become the world’s second-largest AI market with over 6% share of global US$1tn AI spending by 2026,” the note said. For exposure to the future AI growth in China, Leung highlighted Baidu and Alibaba , while calling out Tencent as the premier play — a trio of stocks the firm dubbed “BAT.” Shares of Baidu and Alibaba trade in the U.S. as American depository receipts, while Tencent primarily trades in Hong Kong. BIDU YTD mountain Baidu stock has added nearly 25% from the start of the year. “We believe Baidu, Alibaba and Tencent are the best positioned to lead China’s AI innovation,” Leung said. “They are the cheapest AI plays worldwide in terms of valuation.” All three companies are the dominant developers of large language models in China, Leung added, and already have a tight grip over the necessary data and IT to grow further. “The three internet giants possess real-time search data and proprietary ecosystem data, as well as leading and cost-competitive cloud infrastructure and technology with self-developed chips,” she said. BABA YTD mountain Alibaba stock has added 7.4% from the start of the year. Tencent is a standout, given that the company could stand to benefit the most from China’s recovery from macro-driven headwinds which will delay information technology [IT] spending, Leung added. As the sector grows, she said, “BAT Cloud could resume more than 20% annual growth after repositioning away from low-margin and highly customized projects.” 700-HK YTD mountain Tencent stock. She added that valuations are currently trading at a discount for all three stocks and only truly reflecting each firm’s main businesses, which makes exposure to potential cloud segment upside “a free option.” Of the three names, Tencent sticks out due to the company’s “natural edge in entertainment and enterprise SaaS [software as a service],” the analyst said. – CNBC’s Michael Bloom contributed reporting.
