HSBC: The Great Re-Rating – Why Chinese Internet Stocks Are Finally A 'Strong Buy' In 2025
In a landscape defined by volatility and shifting macro tides, the latest research from The Hongkong and Shanghai Banking Corporation Limited (HSBC), released on December 3, 2025, offers a sobering yet opportunistic roadmap for China’s internet sector.
While the prevailing narrative has long hinged on "deep value," the reality emerging from the third quarter of 2025 suggests a more complex picture: margins are under pressure, the "China discount" is narrowing against U.S. peers, and the path forward relies heavily on aggressive capital expenditure in AI.
For professional investors navigating the divergence between Beijing and Wall Street, the report underscores a pivot from broad ecosystem growth to specific themes: Capex execution, quick commerce efficiency, and overseas expansion.
The Q3 Hangover: A "Mixed Bag" of Margin Misses
The recently concluded 3Q25 earnings season served as a reality check for the sector. HSBC’s analysis characterizes the quarter as a "mixed bag," marred principally by a widespread failure to meet Gross Profit Margin (GPM) estimates. Notably, three out of eight large-cap internet companies missed Net Profit consensus.
The report identifies four structural headwinds that compressed margins in 2025, which investors must weigh as they position for 2026:
- Unfavorable Mix Shift: Legacy giants like Baidu and PDD Holdings saw revenue tilt toward newer, lower-margin businesses (such as cloud for Baidu and overseas expansion for PDD), diluting overall profitability.
- The Cost of Competition: Sales and marketing expenses are climbing again. NetEase ramped up game promotions, while Alibaba Group Holding , Meituan， and JD.com poured capital into user and merchant incentives.
- The AI Tax: R&D costs are swelling, driven specifically by staff and AI-related investments.
- Fiscal Drag: Higher effective tax rates, particularly withholding taxes on dividend-paying value stocks, are biting into the bottom line.
2026: The Year of Capex and Global Ambition
Looking ahead to 2026, the market’s fixation will likely shift from topline recovery to the efficiency of capital deployment. HSBC highlights that the pace of Capex deployment—specifically for AI infrastructure—will be the primary watchlist item.
The bank notes that while depreciation costs are a concern, they are manageable for the cash-rich titans. For Alibaba Group Holding and Tencent Holdings, Capex as a percentage of revenue hovers at a manageable 12%. Assuming a 5-6 year depreciation cycle for AI chips, the margin drag is estimated at 1-2 percentage points per annum—a cost arguably offset by operational efficiencies.
Beyond infrastructure, the only palpable growth story remains overseas expansion. In the cloud arena, Alibaba and Tencent are rapidly expanding their global footprints. In gaming, Tencent and NetEase have posted better-than-expected overseas revenue, providing a rare bright spot for valuation multiples. Meanwhile, in e-commerce, PDD’s Temu has resumed growth in the US following tariff adjustments, and Meituan’s "Keeta" is carving out a long-term narrative in international food delivery.
Valuation: The Convergence Trap?
Perhaps the most critical observation in the report is the erosion of the valuation buffer that China tech has historically offered relative to Silicon Valley.
While the broader China internet sector PE has corrected to 19x (down from 21x in late October), and the discount to U.S. large caps has widened to approximately 44%, a closer look at top-tier names reveals a startling convergence.
HSBC points out a "pushback for investors" who have the option to allocate globally:
"The 1-year forward EV/EBITDA of Alibaba (12.0x) is already trending very close to Amazon (12.4x), and 1-year forward PE of Tencent (15.4x) is even higher than Meta (13.4x)."
This convergence suggests that the "China is cheap" argument is losing potency for the highest-quality assets. If Alibaba is priced similarly to Amazon, the risk premium associated with Chinese equities becomes difficult to justify without significant earnings outperformance.
Stick with the Winners: AI and Games
Despite the margin compression and valuation headwinds, HSBC advises staying the course with companies leveraged to the AI and Gaming themes. The firm maintains "Buy" ratings on the heavyweights, betting that their aggressive investment in 2025 will yield product cycles in 2026 that justify the spend.
- Tencent Holdings : Favored for solid performance from titles like Delta Force and Valorant Mobile, alongside robust ad growth fueled by AI algorithms.
- NetEase : Highlighted for its overseas potential with Where Winds Meet in the short term, and upcoming titles Ananta and Sea of Remnants in the second half of 2026.
- Alibaba Group Holding : Positioned for robust AI-driven cloud growth in 2026.
As the calendar turns to 2026, the easy money in China tech appears gone. Investors are left with a market demanding high Capex for future growth, all while trading at multiples that are uncomfortably close to their U.S. counterparts.