Since the introduction of the R1 model by DeepSeek at the end of January, the fintech sector has experienced considerable ripplesThis new wave of AI technology has driven the Hang Seng Tech Index to rise by approximately 20%, underlining the profound impact that AI concepts can have on capital marketsAs the influence of DeepSeek, hailed as the “light of domestic models,” spreads across various sectors, Morgan Stanley, a prominent player in the financial domain, has recalibrated its outlook on China’s internet giants: Tencent, Alibaba, and Baidu, collectively known as BAT.

On February 16, Morgan Stanley’s strategic analyst Gary Yu and his team released a comprehensive report touching on various dimensions of AI technology's rapid evolutionThey noted that a significant turning point in industry development is represented by the plummeting costs associated with model training and inferenceAccording to Morgan Stanley, this trend is poised to benefit Tencent, Alibaba, and Baidu remarkablyFrom a technological perspective, the reduction in training and inference costs means that companies could acquire more formidable AI capabilities with far lesser investment, thereby accelerating product development and innovation while enhancing competitive standing in the market.

Among these three companies, Morgan Stanley has shown the strongest favor towards Tencent, following closely behind is AlibabaMorgan Stanley maintains an “Equal Weight” (EW) rating on both Alibaba and Baidu but expresses optimism about Alibaba's high-end cloud computing segmentConversely, there are concerns regarding Baidu's search business, particularly surrounding potential disruptions and monetization risks.

Diving deeper, Tencent remains Morgan Stanley's prime selection, with expectations that breakthroughs in consumer-facing AI applications will spur stock price increasesSince the launch of the DeepSeek model, Tencent’s stock has surged by 22%, although this increase lags behind Alibaba’s remarkable 40%. However, Morgan Stanley believes that as the market shifts its focus from large-scale language models (which benefit Alibaba) towards AI applications and monetization—focusing on Tencent—this trend's direction might reverse.

Moreover, Morgan Stanley pointed out that Tencent has already benefited from upgrades in AI-driven advertising technology

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By leveraging AI, Tencent augments its ability to analyze user interests and behaviors with heightened precision, translating to more targeted advertising efforts that enhance effectiveness and profit marginsIt's highlighted that in the Chinese market, the consumer-facing sector (2C) may advance faster than the business-facing sector (2B). Given Tencent's substantial foothold in the 2C domain, it seems well-positioned to seize opportunities in the burgeoning AI application wave.

As for Alibaba, while maintaining an “Equal Weight” rating, Morgan Stanley exhibits confidence in Alibaba's high-end cloud computing divisionThey remarked that despite Alibaba benefitting as China’s largest cloud service provider and leader in open-source large language model development amid the recent AI trend, the recent rebound in its stock price appears to have already priced in the favorable prospects of its cloud computing operations.

According to Morgan Stanley's foundational scenarios, they project that Alibaba's cloud computing revenue will grow by 18% during the fiscal year 2026/27, reaching approximately RMB 163 billion (around USD 21 billion), translating into a projected cloud computing valuation of USD 64 billion by the fiscal year 2027 (around USD 28 per share).

In a more optimistic scenario, Morgan Stanley forecasts a revenue growth of 20% to 25% for Alibaba’s cloud computing sector during the fiscal year 2026/27, potentially hitting RMB 179 billion (approximately USD 23 billion) and envisaging a cloud computing valuation of USD 93 billion (roughly USD 40 per share) by fiscal year 2027.

Turning to Baidu, Morgan Stanley also maintains an “Equal Weight” designationBaidu has a competitive edge in the AI field, boasting extensive technological accumulation in search engine technologies, natural language processing, and image recognitionHowever, Morgan Stanley expresses apprehension that Baidu's core search operations may suffer disruptions stemming from generative AI advancements

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