Goldman Sachs: The market is concerned about the regulation and tax policies of Chinese technology stocks; this year is a strategic turning point for the giants

Goldman Sachs published a report stating that investor focus continues to revolve around the AI investment trends and regulatory risks of Chinese internet giants. Recently, the sector's stock prices have come under pressure, with the Hang Seng Tech Index falling about 10% over the past week, reflecting renewed market concerns about regulatory and tax policies. The bank believes that 2026 will be a strategic turning point for Chinese internet giants, mainly centered around the following three trends: (+/-) Intensified competition in consumer-side AI super applications, where agency functions, seamless transactions, social interactions, and push capabilities will be key to user retention and application diffusion. (+) The rise in capital expenditures for AI by mainland cloud business giants, with investments and full-stack capability building from 2026 to 2027 being core to long-term success, similar to Google's AI ecosystem. (-) Renewed concerns about regulation and taxation, with investors focusing on the similarities and differences with the regulatory cycle of 2020 to 2021, and worrying about pressure on corporate profits.

The bank noted that new releases of AI models/Agent applications during and after the Lunar New Year, breakthroughs in DeepSeek/Engram architecture in HBM/memory optimization, new rounds of consumer-side AI layouts by ByteDance and other internet companies, the upcoming earnings period, and the progress of the State Administration for Market Regulation's antitrust investigations in the next 3 to 6 months will serve as catalysts for the industry.

The bank pointed out that the significant progress of the unlisted ByteDance in the AI field (with the Doubao application leading in both token numbers and DAU), as well as its market share increase in e-commerce and offline retail, is driving the strategic transformation of the overall sector. In terms of valuation, with the recent sector pullback, the Chinese internet stocks covered by the bank's research are not expensive, with a median expected price-to-earnings ratio of only 17 times for 2026.

Regarding regulation, investors are mainly concerned whether recent policies, regulations, and investigations indicate a return to a tightening regulatory cycle, which could affect profit growth and industry valuation multiples for Chinese internet companies. As the implementation details gradually become clear, Goldman Sachs expects that related policies/regulations will present a "growth-promoting + anti-involution" mixed effect, which is positive for the overall industry competitive landscape.

As for the Ministry of Finance and the State Administration of Taxation's earlier announcement regarding telecommunications business activities involving mobile data services, SMS, MMS, and internet broadband services, the tax classification item has been adjusted from "value-added telecommunications services" to "basic telecommunications services." Therefore, starting from January 1 of this year, the value-added tax rate will increase from 6% to 9%. However, regarding investors' concerns about whether the "increase in value-added tax on telecommunications services also applies to internet services," the bank noted that according to the new "Value-Added Tax Law" effective from January 1, 2026, the 6% value-added tax still applies to major internet verticals, including: advertising, gaming and subscriptions, e-commerce platform commissions, e-commerce advertising service fees, live streaming rewards, and electronic albums and subscriptions. The bank indicated that the current value-added tax law in China does not show that the increase in value-added tax for telecommunications operators simultaneously applies to internet companies However, the bank also listed a sensitivity analysis assessment of the potential increase in value-added tax (VAT) for Chinese internet companies, assuming that for every 1 percentage point increase in the VAT rate on revenue from games, advertising, or value-added services, the pre-tax profit impact on Alibaba (09988.HK), Pinduoduo (PDD.US), NetEase (09999.HK), and Tencent (00700.HK) this year would be 0.4%, 0.6%, 0.8%, and 0.5%, respectively, with estimated impacts on their pre-tax profit growth rates of 0.5%, 0.6%, 0.8%, and 0.5%.

In addition, investors have been closely monitoring changes in the corporate income tax policy for Chinese internet companies, as it will affect the long-term profit tax rates of platform businesses, thereby impacting terminal value and free cash flow. Although tax policies may be adjusted, the bank noted that currently, most large platform/internet companies enjoy a preferential tax rate of 15% as "High-tech Enterprises" (HNTE), rather than the standard corporate income tax rate of 25% in China. The qualification for "High-tech Enterprises" must be re-evaluated/applied every three years, and Chinese internet giants need to renew their HNTE qualifications in the fourth quarter of 2026, including Tencent, Alibaba, MEITUAN (03690.HK), JD.com (09618.HK), Ctrip (09961.HK), etc., while some companies will need to renew in 2027 and 2028. Looking back to 2008, the bank noted that some industries that also enjoyed a 15% preferential tax rate experienced a gradual increase over a five-year period, with rates rising from 15% to 18%, 20%, 22%, 24%, and 25%. These companies are mainly located in economic special zones such as Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan.

The bank also listed a sensitivity analysis assessment of the potential increase in corporate income tax for Chinese internet companies, assuming that for every 1 percentage point increase in corporate income tax, the adjusted profit impact on Alibaba, Pinduoduo, NetEase (09999.HK), and Tencent (00700.HK) this year would be 1.1%