Tencent’s AI push could fuel China stock rally—but BoFA sees a correction coming

Tencent is betting big on AI, and investors are paying attention. The company’s upcoming earnings report will reveal just how much it plans to spend to compete with Alibaba, whose stock has already surged on the back of DeepSeek’s AI boom.

However, while Tencent is making moves, Bank of America (BoFA) is warning that China’s stock rally might not last. Alibaba’s Hong Kong-listed stock has climbed over 60% this year, more than twice Tencent’s 30% gain.

Tencent is still about 30% away from its all-time high, but that’s better than many other Chinese tech firms that took a hit from Beijing’s corporate crackdowns. Investors are watching closely—if Tencent can prove its AI business is growing fast enough, it could change the game for China’s tech sector.

Tencent bets on AI growth as China pushes tech expansion

Beijing’s latest promise to boost consumption is pushing Chinese tech stocks higher. Investors want to know if Tencent will follow Alibaba’s AI investment strategy. Alibaba has already committed to spending over 380 billion yuan ($53 billion) in the next three years. The question is whether Tencent will match that level of investment.

David Chen, chief investment officer at Tiger Brokers Hong Kong, says success in AI could shift the outlook for Chinese tech stocks. “It would validate the significant investments being made across the sector and could lead to a positive revaluation of AI-focused Chinese tech companies,” he said.

Tencent has already started integrating AI tools across its platforms. On Tuesday, the company released a new AI service that transforms text and images into 3D visuals, powered by Hunyuan3D-2.0, its large language model. Tencent has also been aggressively using DeepSeek’s AI model, implementing it across WeChat/Weixin and search functions.

Charlene Liu, an analyst at HSBC Holdings, says Tencent’s approach could increase revenue potential. “This open-minded approach should enhance Tencent’s monetization potential as it builds on its strong application development capability, large user base, and unique Weixin ecosystem,” she said. She also noted that AI integration could help Weixin capture more ad spending from clients.

Tencent’s gaming division is also under scrutiny. Investors are closely watching its overseas expansion and the performance of its latest title, Delta Force. Analysts expect Tencent to report 8.7% revenue growth for the December quarter, which would be its best in over a year. Gross margins are projected at 53.3%, close to the highest level in eight years.

BoFA warns China’s stock rally could collapse like 2015

Not everyone is convinced that China’s stock rally is built to last. BoFA strategists are warning that the market could be heading toward a major correction, comparing the current rally to the 2015 boom-and-bust cycle.

The Hang Seng China Enterprises Index (HSCEI) and MSCI China Index have both surged more than 30% since mid-January, a pace similar to the 2015 rally that ended in a 50% crash. “There are quite some fundamental similarities between the current cycle and 10 years ago, with the economic rebalancing cycle and policy cycle,” BoFA strategists wrote.

Despite the hype around AI, Tencent’s valuation is climbing, and some investors are worried. The stock is now trading at 20 times forward earnings, higher than Alibaba’s 15 times, and approaching Meta’s 22 times. Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management, says Tencent must prove it can sustain growth. “Pure optimism may not be sufficient to have further multiple expansion, Tencent needs to deliver numbers,” he said.

Options traders are already bracing for volatility. They are pricing in a 4.4% move in either direction after Tencent’s earnings, compared to an average 2.2% swing in its last eight reports.

On a recent investor trip to Shanghai, BoFA strategists reported that long-term investors in China are growing cautious. Concerns over job market struggles, deflation, and weak credit demand are building. Geopolitical risks remain another concern, and some investors worry about tech stock bubbles forming.

The HSCEI index fell 0.9% on Wednesday before recovering. The MSCI China Index moved in a similar pattern but is still up 23% for the year. The rally may continue for now, but if BoFA’s warnings hold true, a major correction could be around the corner.

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