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CICC's research department proposes the judgment that AI may shift from a "friend" that drives traditional demand to an "enemy" that crowds out traditional demand. The report notes that in the second quarter, the free cash flow of major U.S. cloud providers other than Microsoft and Meta all turned negative, and AI has begun to require external financing, potentially crowding out physical and financial resources as well as policy space. The report estimates that the ROIC of U.S. cloud providers is about 19.9%, still above the WACC of about 9.6%, and calculates that the interest rate the overall U.S. economy can bear is about 5.5% to 6%, that of the AI sector above about 7%, and that of traditional sectors around 4%. Subsequent reports state that CICC's research department estimates that as of the second quarter, the weighted ROIC of China's leading cloud providers Tencent, Alibaba and Baidu was about 11.9%, lower than the 19.9% of U.S. cloud providers, and their free cash flow all turned negative in the second quarter; the report holds that China's AI investment relies more on the tilt of fiscal and credit resources, and its crowding out of traditional demand may be faster than that in the United States.
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Oct 27
Wallstreetcn
CICC estimates Chinese cloud vendors' ROIC at about 11.9%, judging that AI's crowding out of domestic demand may be faster than in the US
CICC Research Department estimates that as of the second quarter, the weighted ROIC of leading Chinese cloud vendors Tencent, Alibaba and Baidu was about 11.9%, lower than the 19.9% of US cloud vendors, and all had negative free cash flow in the second quarter. The report argues that China's AI investment relies more on fiscal and credit resource tilting, and its crowding out of traditional demand may be faster than in the US. The report also estimates that the overall US economy can withstand interest rates of about 5.5~6% and a 50% cost increase, while the AI sector can withstand interest rates of about 7~7.5%.
Oct 26
Wallstreetcn
CICC: Is AI shifting from a "friend" of traditional demand to an "enemy"?
CICC's Research Department noted that in the second quarter, free cash flow at major US cloud providers other than Microsoft and Meta all turned negative, and AI is beginning to require external financing; it may shift from a "friend" that drives traditional demand to an "enemy" that crowds out physical resources, financial resources, and policy space. The report estimates that US cloud providers' ROIC is about 19.9%, still above WACC of about 9.6%, and calculates that the US overall economy can withstand interest rates of about 5.5% to 6%, the AI sector about 7% or more, and traditional sectors about 4%; China's leading cloud providers have a weighted ROIC of about 11.9%, with crowding out manifested more through the tilt of fiscal and credit resources.