CLSA reiterated its high-conviction outperform rating on Tencent Holdings (0700.HK) with a HKD740 target price, arguing the company's Hy3 AI model has surpassed the distillation techniques under US scrutiny. The brokerage said Tencent and Alibaba remain core holdings for global funds despite potential US investigations into Chinese AI intellectual property practices.
CLSA reiterated its high-conviction outperform rating on Tencent Holdings with a HKD740 target, saying its AI models have moved beyond the distillation techniques drawing US scrutiny.
"Tencent Hy3 has 295 billion parameters and can outperform GLM 5.1 with half the model size, completing the same tasks at half the cost," CLSA said in a report.
The note follows US Treasury Secretary Scott Bessent's statement that the administration would scrutinize Chinese open-source AI models for intellectual property theft, with potential sanctions under consideration. Bessent said watermarks of American large language models were found on many Chinese AI offerings, and the Treasury would investigate in the coming days or weeks.
Tencent and Alibaba are core holdings for the vast majority of global funds, CLSA noted, meaning any broad US action against Chinese AI could have outsized portfolio impact. The US and China are scheduled to hold their first bilateral AI talks in September, with Bessent expected to lead the US side.
The US scrutiny centers on model distillation, a technique where a larger model's output is used to train a smaller one. Anthropic has accused three Chinese AI companies — Moonshot, DeepSeek and Minimax — of violating its terms of service to extract capabilities from its Claude model. OpenAI separately accused DeepSeek of similar practices in a memo to the House of Representatives.
The debate over distillation has divided the industry. Hugging Face Chief Executive Clem Delangue said the practice is "a very small factor" in creating good models and is used by companies globally, including in the US. Microsoft Chief Executive Satya Nadella called it "ironic" for AI companies that benefit from fair-use training rights to impose restrictive distillation terms on others.
CLSA acknowledged that recent capital inflows into memory and hardware stocks may pressure Tencent and Alibaba's share prices. Still, the brokerage maintained that both companies' technology leadership and cost advantages support their fundamental thesis. Tencent's Hy3 model, with its parameter efficiency, represents a structural advantage that cannot be replicated through distillation alone, the brokerage argued.
Chinese President Xi Jinping last week called for open AI cooperation, urging nations to "jointly oppose overstretching the national security concept in the field of AI."
The reaffirmed rating shows CLSA views Tencent's AI position as resilient to regulatory headwinds. Investors will watch the September US-China AI talks for clarity on potential sanctions.
This article is for informational purposes only and does not constitute investment advice.
