DeepSeek, often humorously dubbed the industry disruptor, is ushering in a new phase of value reassessment for China's technology assetsThis comes at a time when various leading firms across multiple sectors in China are integrating their products into the DeepSeek large model, with Tencent being no exceptionCurrently, with its massive user base of over a billion on WeChat, the application is conducting gray testing to interface with DeepSeekThis strategic move has potentially transformed WeChat into a super search entry point and has resulted in a significant 7% drop in Baidu’s stock value.

Following the announcement that Tencent's AI assistant "Yuanbao" would officially connect with DeepSeek-R1, Tencent has launched yet another significant feature.

On the evening of February 15, WeChat began its official gray testing phase integrating the DeepSeek-R1 modelUsers can access an "AI Search" option at the top of their WeChat chat interface, leading to an input box that offers choices between "Quick Q&A" and "In-depth Thinking."

The announcement led to a dramatic spike in Tencent’s stock on February 17, with the company opening nearly 7% higherTencent’s share price even crossed the threshold of 500 Hong Kong dollars per share, eventually closing at 493.6, marking a 3.96% increaseRelated stocks also surged, with firms like Data Port, YunSai ZhiLian, Donghua Software, Hongxin Electronics, and Kehua Data reaching their bidding limit upward, and other companies such as Bosi Software and Changliang Technology also benefiting from the trend.

A closer look at Tencent's remarkable stock performance reveals it is closely tied to the way DeepSeek’s emergence is redefining the values of China's technology assetsWhile Tencent reaps the rewards from the DeepSeek collaboration, the repercussions for Baidu, which recently announced its own integration with DeepSeek, are quite detrimental.

WeChat’s integration with an AI search entry like DeepSeek significantly amplifies its existing platform

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As a "super application" with more than 1.3 billion monthly active users, the news of WeChat incorporating DeepSeek has sent waves across the market.

Tencent confirmed that WeChat’s search capabilities are being enhanced through the application of DeepSeek's large model, which is currently in gray testingFor select users, the AI-driven search will be available for free in its full capacity, featuring both quick responses and options for deep inquiries.

Specifically, the AI search connected to DeepSeek is designed to automatically support internet searches, eliminating the need for users to manually select their search sourcesThe data fed into this search function includes both content from the WeChat ecosystem and information from across the internet, primarily sourced from the official accounts on WeChat.

Tencent has emphasized that using large models in search scenarios enhances the intelligence and accuracy of searches, leading to better understanding of user intentions and the capability to analyze complex queriesBy blending user demands with these advanced models, WeChat aims to improve the overall search experience for its users.

The groundwork for WeChat’s integration with DeepSeek had been laid well in advanceTencent Cloud and multiple products from Tencent, including its knowledge applications development platform, were among the first instances to integrate the DeepSeek model.

On February 13, Tencent’s AI assistant, "Tencent Yuanbao," also received a major update, now supporting both the Hunyuan and DeepSeek modelsUsers opening the Tencent Yuanbao chat interface can freely utilize the full version of the DeepSeek-R1 modelThe support from DeepSeek enables networked searches, integrating data from WeChat’s official accounts, video accounts, and other sources within Tencent's ecosystem.

According to Changjiang Securities, WeChat’s search acts as a primary entry point to the "super app," leveraging substantial data through its official accounts, video channels, and user chat history

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The integration with DeepSeek is expected to enhance the value of WeChat's ecosystem data, potentially allowing the creation of personal AI assistants for usersMore functionalities possibly designed to meet user needs can increasingly be incorporated directly within WeChat, with its core scene and rich data continuing to play a critical role.

Moreover, according to Tencent’s financial report, as of September 30, 2024, WeChat and WeChat combined reached a staggering 1.382 billion monthly active accounts, making it one of the applications with the highest user engagement in ChinaWeChat's decision to connect with DeepSeek could significantly reshape the landscape of China’s AI industry.

For DeepSeek, collaborating with a leading global technology giant like Tencent offers an ideal testing ground and platform for technical validationThis partnership allows DeepSeek to swiftly investigate the stability and effectiveness of their technology in a large-scale commercial context, while also leveraging Tencent's extensive influence to promote its technology further.

The richness of data resources will enable DeepSeek to optimize algorithms and enhance model performance, making it better suited to the varied demands across different scenarios, simultaneously improving the model's versatility.

The impact of WeChat connecting with DeepSeek has produced a multifaceted effect on both entities and the market, creating a shared landscape where some celebrate while others lament.

Since the launch and open-sourcing of the DeepSeek-R1 model, a plethora of cloud providers and various enterprises have swiftly integrated or merged the model into their systemsHowever, WeChat's integration stays particularly noteworthyAs a significant pool with over 1.3 billion monthly active users, WeChat's connection to DeepSeek-R1 not only provides immense application scenarios and data resources but could also instigate far-reaching changes in areas such as social media, content creation, and user interactions, surpassing the influence of standalone product integrations.

According to Changjiang Securities, WeChat’s connection to DeepSeek embodies an upgrade from being merely a "traffic platform" to a "smart operating system." The sheer amount of users promises to expedite the permeation of AI capabilities

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Post-integration, users may readily turn to WeChat for AI services, potentially diverting traffic from other standalone applicationsThis shift may imply a diminishment in market space for traditional search engines like Baidu.

For Baidu, the implications of WeChat's integration with DeepSeek are undoubtedly severeFollowing the announcement, Baidu’s stock plummeted 6.94%, closing at 89.85 HKD per share.

With WeChat’s vast user base and extensive content ecosystem connected with DeepSeek's AI search abilities, the result is a robust information retrieval loop that could siphon off a segment of Baidu’s user traffic, especially from those who prefer finding information through WeChat.

Furthermore, WeChat’s AI search features will further enhance its content ecosystem, making it considerably more competitive in terms of information retrieval and content distributionIn contrast, Baidu struggles with similar ecosystem integration advantages, intensifying competitive tensions in the search domain.

Additionally, the open-source attributes of DeepSeek lower the barriers to AI application development, allowing more mid-sized tech enterprises to enter the marketplace, which further fragments market share.

While Baidu has also implemented DeepSeek, the user experience and contextual advantages offered by WeChat may reveal inherent weaknesses in Baidu’s traditional search operations and market standing.

In this light of rapid market transformations, Tencent's stock surge correlates with a recalculated value within the capital market.

For the market, WeChat's integration with DeepSeek signifies the emergence of a super search entry, hosting upwards of a billion monthly active usersThis not only forecasts a reconfiguration of the Chinese AI market and its affiliated industrial chain but also infers a revaluation of Tencent’s worth.

Tencent has the opportunity to employ AI for optimizing existing functionalities across advertising, mini-programs, and corporate WeChat services, enhancing monetization capabilities

According to Tencent's third-quarter report of 2024, its marketing services generated 29.993 billion RMB in revenue, marking a 17% increase compared to the same quarter last year, fueled primarily by advertisers’ robust demand for video accounts, mini-programs, and WeChat "search and search" advertising inventory.

Moreover, with the integration of DeepSeek, Tencent's advertising team stands to gain significantly through algorithmic optimizations, such as STEM-AL technology, which substantially boosts click-through rates (CTR) and enables more precise ad placementsThis model aligns closely with Meta’s approach to leveraging AI for advertising efficiency—an understandable and accepted strategy within market circles.

Furthermore, DeepSeek's open-source model drastically lowers the computational requirements for training and deploying AI models, minimizing entry costs for enterprisesThis low-cost high-performance model invites more mid-sized businesses to refine and deploy their AI models via cloud platforms, subsequently propelling demand for cloud services.

For Tencent Cloud, this escalation in growth potential and market valuation is likely to invigorate further collaborative efforts, ultimately benefiting TencentThe incorporation of DeepSeek and analogous technology provides developers with robust tool support, extending the application scope of Tencent Cloud servicesPresently, Tencent Cloud's valuation constitutes roughly 5% of Tencent's total market value, suggesting there remains ample room for expansion.

After integrating DeepSeek, WeChat has not only reshaped interaction paradigms but also significantly enhanced user experience and platform efficacy through AI technologiesFor instance, the ability for users to obtain information through natural language dialogues and accelerated connections between mini-programs and AI responses signal WeChat's evolution from a mere information conduit to a closed-loop service provision platform.

As such, driven by AI technology, Tencent is poised for breakthroughs across advertising, cloud services, and the WeChat ecosystem, propelling its valuation upward.

Analyzing this market context, DeepSeek’s success is profoundly reconstructing global capital perceptions and valuation methodologies towards Chinese tech enterprises, facilitating a transition from valuation repair to a new phase of valuation growth for Chinese tech assets.

Goldman Sachs also noted in its research report that onshore and offshore Chinese stocks have emerged as the "largest nominal net-buy market" this year, forecasting a 14% anticipated increase in the MSCI China Index under neutral projections, potentially reaching as high as 28% in optimistic scenarios

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