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In October 2022, the US first directly moved to limit China’s access to developing AI infrastructure. Since those export controls took hold, USG widened the export ban from Nvidia’s A100 and H100 to A800 and H800. At the end of March 2024, USG further expanded AI chip restrictions to laptops and chipmaking tools.

China’s official response warned that USG behavior will “disrupt the global semiconductor market as well as cooperation between enterprises.” However, such policies were always on borrowed time. The fact that USG is committed to curtailing China’s technological development is itself a reflection of US anxiety.

By 2030, consultancy firm PwC estimated that China will add up to $7 trillion to its GDP from AI integration. Moreover, the hostile USG pressure is elevating China’s investments in chipmaking foundries. As of May, China’s government set up a third investment fund worth $47.5 billion to develop its semiconductor sector.

This is a part of CCP’s 14th Five-Year Plan (2021-2025) to make China less reliant on exports and more on domestic consumption and efficiency. Considering that China has already exceeded in the scaling of the EV industry compared to its US/EU counterparts, it is unlikely that the AI sector will not follow a similar success story.

Baidu ADS (NASDAQ: BIDU)

Just as USG has Google to count on, originating from the US intelligence community, China has wide moat Baidu. Working in concert with the Great Firewall of China, Baidu’s search engine usage holds at 52.11% market share, with Bing at 31.53% next in line.

Around -70% of Baidu’s revenue comes from pay-for-performance advertising, cloud services, online gaming and education, all of which make Baidu Core. Furthermore, the company continues to make Apollo Go advances as a fully autonomous ride-hailing service, which now covers the entire Wuhan. 

In May, Baidu launched the 6th generation robotaxi RT6, built by state-owned Jiangling Motors Group. Year-over-year, Apollo Go tracked 26% growth, having executed 899k rides in Q2 2024. Cumulatively, the ride-hailing service surpassed 7 million rides.

It bears noting that Cathie Wood’s $2600 price target of Tesla stock by 2029 is contingent on its robotaxi launch, which should account for 63% of Tesla’s revenue. It is fair to say Baidu is ahead of this game with a friendly regulatory environment in addition to allowing Tesla to test its Full Self-Driving (FSD) software in Shanghai.

Due to costs of traffic acquisitions, Baidu’s Q2 2024 revenue flatlined YoY at $4.67 billion. Online marketing ($2.64B) decreased by 2% YoY, while AI Cloud business grew 10% to $1.03 billion. Baidu’s mobile ecosystem also improved by 4% YoY growth with 703 million monthly active users (MAUs).

Covering all AI layers, from robotaxi, data centers and apps to cloud and ERNIE 4.0 Turbo that rivals ChatGPT, this makes Baidu the premiere AI exposure for long term growth. Year-to-date, BIDU stock is down 24.6% to present $86.96 per share against the 52-week average of $107.27. Significantly under its 52-week high point of $151, this makes BIDU a bargain at this point in time.

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Tencent Holdings Ltd. ADR (NASDAQ: TCEHY)

In addition to holding the dominant WeChat “everything app”, Tencent is all about monetizing online entertainment and harnessing targeted advertising through its extensive ecommerce and social media ecosystem.

The bulk of Tencent’s revenue comes from value-added services, followed by mobile payments, cloud computing and online advertising. Across the West, Tencent has many large and small stakes in the video gaming industry, from Riot Games and Epic Games to Ubisoft, Paradox Interactive, Remedy Entertainment and even Grinding Gear Games (Path of Exile).

Although without a robotaxi service, this makes Tencent even more app-oriented, which is open to AI integration. Like Alphabet, the company has multiple machine learning labs, such as YouTu, advancing speech recognition/replication, natural language processing and computer vision.

In Q2 earnings delivered on August 14th, Tencent tracked 8% YoY revenue growth of $22.6 billion with operating profit increasing by 27%. Likewise, the company’s operating margin as a measure of profitability increased from 31% to 36%. Tencent ended the quarter with impressive $5.7billion free cash flow, up by 35% YoY.

TCEHY stock is up nearly 30% year-to-date. Currently priced at $48.53, it is not far from the year’s top of $51.67 in May. Although Trump’s potential 2nd term could exert a negative impact on China-based stocks, it is likely priced in given existing aggressive moves by the Biden admin.

PDD Holdings ADS (NASDAQ: PDD)

As the parent company of Pinduoduo and Temu, PDD is rapidly expanding its global e-commerce business. Both platforms focus on retail discounts, with Temu as the international version of Pinduoduo having launched in September 2022.

Owing to the established direct-to-consumer business model, Temu gained a competitive edge and expanded to nearly 50 countries by early 2024. Considering the cost of living pressures experienced across the West, this further boosted Temu’s bottom line.

In Q2 earnings delivered on August 26th, PDD showed high-growth of 86% YoY to $13.35 billion. The company’s net income was even more impressive at 144% YoY increase to $4.4 billion. 

Those who have already seen Temu’s YouTube ads know that PDD is heavily taking advantage of AI to create content, localize it and target users. This is not surprising given the company’s ramp up of hiring LLM software engineers at the end of 2023.

Presently priced at $96.44, PDD stock is under its 52-week average of $127.40 per share, and near its 52-week low of $89.50. Although having impressive growth, the Q2 earnings report missed market estimates amid weakened consumer spending. 

In turn, this dropped PDD shares from $139.87 to $96.44 on Monday, providing a rare opportunity for exposure to Temu’s promising business model.

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Disclaimer: The author does not hold or have a position in any securities discussed in the article.