Alibaba, China’s leading cloud computing platform, impressed investors with a sharp acceleration in cloud revenue growth to +13% year-on-year, up from 7% in the previous quarter and 3% above expectations, driven by triple-digit AI growth.
The real standout, however, was Alibaba’s $4.3 billion quarterly capex, marking a 300% year-on-year surge and 80% quarter-on-quarter growth. The company’s three-year capex guidance surpasses its total spending over the past decade, pointing to annual investments of ~$16 billion—60% above consensus.
This sudden spending spree reflects Alibaba’s anticipation of surging demand for its cloud and AI offerings following the launch of DeepSeek’s (and rival) AI models in China. We see two key implications. First, DeepSeek could be China’s “ChatGPT moment”, its rapid adoption across industries (pharma, finance, manufacturing) suggesting an imminent acceleration in cloud business growth.
Second, it confirms the view that capex is rising, not falling, despite the introduction of lower-cost AI models. Expectations for higher AI usage are indeed sparking capex upgrades, as illustrated by Alibaba and US hyperscalers’ recent earnings calls.
If this is indeed China’s ChatGPT moment, an AI arms race among hyperscalers like Tencent, Baidu, and Bytedance is likely, benefiting the entire data center supply chain in both China and the US. In China, we could mention Beijing Sinnet Tech and Shanghai @hub in the data center space, Henan Shijia Photons Tech and Zhongji Innolight in optoelectronics, Hygon Information Tech and Montage Technology in specialty semiconductors just to name a few.
Beyond infrastructure, hyperscalers themselves stand to gain, with Tencent and Alibaba being the most well positioned here:
- Their cloud businesses will see improved growth,
- Their massive data can be leveraged for AI model development and monetization,
- Their advertising revenue is to benefit from the impact of AI on user engagement and monetization, mirroring recent trends in the US.
Lastly, this new cycle for data center demand in China could be a major positive for data center operators such as GDS and VNET. Indeed, their high financial leverage (6x net debt/EBITDA) makes their earnings very sensitive to improving data center demand and potential rental price hikes.
In conclusion, we have had a sizable exposure to Chinese names in several of our portfolios (Big Data, Gaming notably) and are likely to keep increasing exposure in other portfolios.
