The Goldman Sachs Group, Inc.
EQUITY RESEARCH
|August 31, 2017
China has emerged as a major global contender in the eld of AI, the apex
technology of the information era.In this report, we set out China’s
ambitious top-down plans, the factors (talent, data and infrastructure)
that make China unique and the companies (Baidu, Alibaba and Tencent)
that are making it happen. We believe the development of an ‘intelligent
economy’ and ‘intelligent society’ by 2030 in China has the potential to
drive productivity improvement and GDP growth in the next two decades.
Piyush Mubayi
+852-2978-1677
piyush.mubayi@gs
Goldman Sachs (Asia) L.L.C.
Elsie Cheng
+852-2978-0820
elsie.cheng@gs
Goldman Sachs (Asia) L.L.C.
Heath P. Terry, CFA
+1-212-357-1849
heath.terry@gs
Goldman Sachs & Co. LLC
Andrew Tilton
+852-2978-1802
andrew.tilton@gs
Goldman Sachs (Asia) L.L.C.
The New New China
China's Rise in
ArticialIntelligence
Tina Hou
+86(21)2401-8694
tina.hou@ghsl
Beijing Gao Hua Securities
Company Limited
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the rm may have a conict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. For Reg AC certication and other important disclosures, see the Disclosure
Appendix, or go to gs/research/hedge.html. Analysts employed by non-US afliates are not
registered/qualied as research analysts with FINRA in the U.S.
songsh@sk Sunny Song 09/07/17 02:03:39 AM Hynix Semiconductor, Inc.
August 31, 2017 China: Technology: Internet
Goldman Sachs Global Investment Research 2
Table of contents
AI rises in the East 2
China AI launches: A new national development plan 4
China has made major strides in AI vs. the rest of the world 6
Key drivers of value creation in China AI 9
Talent: China attracting the world’s best minds 9
Data: 44 zettabytes to be exploited in benign regulatory environment 10
Infrastructure 10
Silicon 12
Baidu Inc (BIDU): “All in AI” 13
Scientists and research team at Baidu 13
Data at Baidu 13
AI at Baidu 14
Baidu valued at US$326 by 2020E 19
Alibaba (BABA): A world-leading use case for AI 20
Apsara: AliCloud’s independently developed super computational system 20
Data at Alibaba 23
“Fully loaded 2020 valuation” 24
Tencent (0700.HK): AI significant potential to monetize portfolio 26
AI research at Tencent 26
Data at Tencent 26
Use case of AI at Tencent 27
Implications of AI on Tencent’s business 28
Fully loaded valuation on Tencent 29
Meituan Dianping: World’s largest O2O platform 31
DiDi Chuxing: 4,500TB of data processed daily 35
iFLYTek (002230.SZ): The leading player in China Intelligent Speech 37
Hikvision (002415.SZ): World leader in surveillance through AI lens 38
AI companies in China - the others 39
AI & the productivity challenge: An interview with Andrew Tilton 44
Appendix: What is artificial intelligence 47
Disclosure Appendix 50
Contributing Authors:
Piyush Mubayi, Elsie Cheng, Heath Terry, Andrew Tilton, Tina Hou, Donald Lu, Ronald Keung, Fan Liu.
Note: Prices in this report are as of the August 29, 2017 market close unless indicated otherwise.
OUR VIEWS ON BAT
Baidu (BIDU, TP: US$240, latest close: US$220.65, Buy)
Our 12-month SOTP-based target price is at US$240. Maintain Buy. Key risks: slower recovery in search business; weaker
macro.
Alibaba (BABA, TP: US$208, latest close US$167.41, CL-Buy)
Our 12-month SOTP-based target price is at US$208 (25x PE for China e-commerce). CL-Buy. Key risks: slower GMV
growth, lower monetization, competition.
Tencent (0700.HK, TP:HK$369, HK$319.80, Buy)
Our 12-month SOTP-based TP is at HK$369. Maintain Buy. Key risks: Slower online gaming growth, fiercer competition
in P4P ad.
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August 31, 2017 China's Rise in Artificial Intelligence
Goldman Sachs Global Investment Research 3
Executive summary: New China to be driven by AI
China’s shift from an industrial to a new consumer economy is well underway. In our view
the next stageto be a global leader in artificial intelligence (AI) and machine learning (ML)
government, the corporates, and their massive data sets are coming together to create
value across multiple parts of the economy. In this report we set out the ambitious top-
down plans, the factors that make China unique, and the companies making it happen. We
expect the building of an “intelligent economy” and “intelligent society” by 2030 in China -
with a Rmb1trn AI industry (and Rmb10trn relevant industries) targeted by the central
government - to drive productivity improvement and GDP growth in the next two decades.
We believe the benefits of AI will initially accrue to companies with unique and substantial
data sets, and right-sized resources - BAT (Baidu, Alibaba, Tencent). For these three giants
AI should help crystalize the value in the data from their multiple, distinct businesses as
well as their associates.The frontier of AI/ML in China, meanwhile, has begun to move on
to innovative AI/technology startups that boast the best in class global talent. These
innovators have established core technology competencies, and are pushing AI adoption
across various different industries to create new demand. As a result, the battle of the
giants in China will extend to AI talent - encouragingly the large audience in a largely
homogenous market is a magnet for international talent.
Baidu leads AI research, with cutting-edge capabilities
Baidu, among the first movers in AI globally, is leading the technology for speech
recognition and autonomous driving. As the first Chinese company to open source its deep
learning platform in 2016 (PaddlePaddle for voice/facial recognition, data analysis, deep
learning algorithms, etc.), the company continues to strengthen its AI ecosystem via
launching the project Apollo autonomous driving platform in April 2017.
Alibaba, a world-leading use case of AI
Alibaba’s gigantic ecommerce platform with a GMV of US$547bn in FY17, is one of the
largest use cases for AI. The success of Alibaba’s personalization strategy over its 500mn+
shoppers has demonstrated how ML, when combined with data, is transformative. We
expect Alibaba to continue to leverage its technology via AliCloud to further improve its
algorithm and enhance yields across its assets.
Tencent, the biggest social network in China is mastering AI
Although relatively a late comer on AI among BAT, Tencent‘s Seattle AI lab launch in 2017
signifies both the coming of age of neural networks as well as a shift toward fundamental
research in China. We expect AI to improve targeting for Tencent’s advertising and gaming
assets, which will raise returns on a generally under-monetized portfolio that includes
social network with the highest time spent on the internet, the world’s most successful PC
and smartphone games, and the world’s largest online reading and music customer base.
Meituan, the largest O2O platform built by technology
Meituan, one of Tencent’s major investments, is the world’s largest O2O services platform
in a US$1.5tn market. With 1PB data generated daily, the platform is disrupting traditional
services industr