Following the second-quarter earnings season and the conclusion of the Asia Leaders and Communacopia + Technology conferences, Goldman Sachs has highlighted key themes and focal points across the Chinese internet sector and AI model landscape, while updating its subsector preferences and top stock calls. The firm upgraded Games/Entertainment to the top slot on defensive growth prospects and raised Internet Vertical/Education to third place on attractive valuations.
Investor attention is converging on five critical areas. First, the mixed third-quarter earnings outlook, where Goldman Sachs anticipates soft consumption will weigh on e-commerce, advertising, and local services growth, while games, cloud, and internet verticals are seen as more defensive and resilient growth drivers. Second, AI cloud expansion, where the firm sees room for further upward estimate revisions given tight compute demand and positive cross-validation from US hyperscalers, prompting an upgrade of September-quarter growth for Alibaba Cloud to 53% from 50%, though questions persist around capex funding sources and the sustainability of high ROIC. Third, intensifying AI model competition, where performance gaps are narrowing and efficiency, financial strength, and product harnessing have become more critical differentiators. Fourth, rising interest in agent applications across workplace and personal AI assistants, with investments potentially creating sustainable data flywheels, although ROI and long-term retention concerns remain. Fifth, the evolving AI policy, regulatory, and tax landscape, with risks flagged around distillation, US supplier transactions, overseas compute access, and preferential high-tech tax rates, while e-commerce merchant taxes have limited impact on shelf-based platforms and games companies face no VAT changes this year; offshore trust tax worries have pressured Hong Kong-listed stocks.
Given the year-to-date share price weakness and post-earnings declines, Goldman Sachs reassessed mega-cap valuations relative to historical troughs, EPS revision prospects, free cash flow positions, and USD funding needs. The revised subsector ranking places Games/Entertainment first, Cloud/Data Centers second, Vertical/Education third, E-commerce fourth, and AI Models fifth. Target prices and earnings forecasts for Tencent and Alibaba have been updated to reflect AI application investments and Alibaba's recently announced financing.
Tencent (Buy): Profit growth faces pressure from increased AI investment, but year-to-date underperformance already reflects EPS compression and valuation de-rating. AI technology stack visibility has improved markedly over the past six months. Downward revisions put 3Q/4Q26E EPS growth at -2%/-5% and FY27E at 0%, versus previous 4%/0%/5%. Net profit for 2026-28E is trimmed by -3% to -8%. Robust core profits plus a $130 billion investment portfolio, largely overseas, cover higher capex and prepayments, with management ruling out equity financing plans. Key 6-12 month share price drivers include the next-generation Hunyuan release, WorkBuddy retention and payment rates, WeChat's adoption, and Tencent Cloud's renewed commitment to rejoin China's top three hyperscalers.
Alibaba (Buy): Results delivered positive momentum, with cloud growth as the standout, higher capex but improved ROIC certainty, and an EPS inflection starting in the September quarter. Unit economics for instant retail are improving, with FY27E/28E losses halved and FY29E turning positive as planned. The firm continues to expect FY27E/FY28E EPS growth of +64%/+33% on a consolidated basis, or +58%/+27% on a per-share basis, with cloud growth raised to 53%/55%/55% for the September, December, and March quarters. The target price cut reflects the dilutive impact of the HK$80 billion equity raise, with management indicating no further financing within FY27.
PDD Holdings (Buy): Mixed 2Q26 results showed online marketing +3%, better than expected on resilient domestic GMV, while transaction services missed at +13% due to Temu navigating global tariffs and regulatory shifts. The EU's July removal of the de minimis exemption, replaced by per-item fixed tariffs, adds pressure, with Goldman Sachs estimating Europe accounts for roughly one-third of Temu's GMV. Long-term investments in first-party operations, including the new Bemuvo own-brand launched in select markets in June, alongside local supply chain and warehousing, are viewed as positive.
Xiaomi (Buy): Smartphone margin concerns should ease in 2H26 on favorable memory pricing and disciplined execution. IoT revenue growth is at a potential inflection point, with easier domestic comparisons and strong overseas demand. Smart EV acceleration, driven by the SkyNomad release, and AI progress should reignite ecosystem growth. Watch for the potential MiMo-V3 launch this month, SkyNomad order disclosures after October 7, and Double 11 GMV.
NetEase (Buy): A steady non-AI compounding story with record margins and free cash flow. Forecasts show 3Q/4Q26E game revenue +5%/+5% and operating profit +20%/+16%. The catalyst is Ananta's global launch in January 2027.
Meituan (Buy): While investors worry about a sequential decline in third-quarter food delivery margins due to narrowing unit economics advantages, Goldman Sachs views the uneven quarterly recovery as a deliberate strategy to gain GTV share during peak season amid rising rider costs. Per-order profit forecasts are cut to -0.1 yuan/0.6 yuan/1.1 yuan for 2026E/27E/28E from 0.3/0.8/1.1, with medium-term delivery EBIT maintained at 1.1 yuan per order.
Zhipu Z.AI (Neutral): 1H26 results showed better-than-expected open platform/API monetization and ARR growth, though overall revenue and profitability were dragged by the shift from local deployments to cloud-based MaaS. Year-end 2026 ARR is raised to $2.7 billion from $2.5 billion, versus MiniMax's $1.2 billion forecast. Management emphasizes capturing high-value tokens rather than maximizing token volume, with coding remaining the primary entry point.
JD.com (Buy): Positioned as a valuation recovery and re-rating story for the second half of 2026, driven by top-line recovery and year-over-year profit growth. The target price is unchanged, and the stock has outperformed within the Chinese internet space year-to-date.
MiniMax (Buy): Despite a significant discount to Kuaishou's post-financing valuation of $18 billion and Zhipu, the firm views M3's competitive strategy and the H3 multimodal launch as positive drivers for ARR growth, with substantial valuation re-rating potential in 2H26. Advantages include full multimodal offerings, commercialization capability, per-token cost efficiency, and organizational effectiveness. VNET Group (Buy): Wholesale IDC is entering a revenue/EBITDA acceleration phase with 2026E-28E CAGR of 37%/35%. Year-to-date bookings of 862MW plus 355MW have been secured, against a full-year new order guidance of 1-1.1GW, including reservations of about 1.4GW. The related-party transaction with CATL is expected to close by end-September, bringing cost-effective and sustainable power synergies. New Oriental (Buy): Valuation is attractive relative to history, peers, and its own EPS growth. 1QFY27 revenue growth should exceed the full-year pace, with overseas-related revenue turning positive. Shareholder returns are up to $500 million, or 5%-6% of market cap, with cash dividends rising from about $200 million in FY26 to $300 million in FY27. KE Holdings (Buy): A structural beneficiary of China's new property policy, which favors existing home transactions, high-quality completed projects, and integrated living services. The three-pronged thesis includes accelerated inventory home turnover, which drives margin expansion with minimal fixed-cost increments, higher brokerage channel penetration in new homes with stable commission rates, and synergies from new initiatives like home renovation and rental services. The stock trades below 15 times 2026E EPS and below 14 times forward twelve-month earnings, one standard deviation below historical averages.