In early June, Macquarie analysts launched a tour of China's Internet industry.

On the first day of the "China Internet Expedition Tour", Macquarie conducted a field trip to Yiwu and interviewed experts, covering topics such as recent trade disputes, fulfillment and supply chain impact. Macquarie was generally surprised by Yiwu's resilience and adaptability, saying Temu quickly turned to a semi-consignment model and believed that the Belt and Road countries remained the main growth pillar of cross-border transactions, and expected the soaring freight prices to continue. Macquarie upgraded SF Holdings to "outperform the market" (Macure's latest rating and target price list of Chinese Internet stocks is shown in Figure 2 in the article).

On the second day of the "China Internet Expedition Tour", Macquarie arrived in Hangzhou, focusing mainly on artificial intelligence (AI), especially how Internet platforms embrace technological changes. The overall conclusion is: 1) AI demand promotes the accelerated implementation of public cloud, bringing new revenue sources to leading cloud service providers (CSPs). 2) Remarkable ecological advantages: the leading ecosystem has natural advantages in data, technology and talents. 3) Agent AI has become the core theme, but cross-ecosystem integration still takes time.

We will continue to pay attention to follow-up inspections and summary.

1. The first day of China's Internet Journey: Analysis of the key points of the impact of Yiwu tariffs

Yiwu Internet Survey

On June 3, we held an Internet inspection in Yiwu, China, including multiple expert interviews and field visits to Yiwu International Trade City. Through this world’s largest small commodity trading market, we believe it provides some details for the current trade disputes, cross-border dynamics and the transformation of supply chain models.

Overall, we were surprised by Yiwu's overall resilience and adaptability, as most of the city's exports depend on the 1039 model, i.e. the market procurement model. Despite a temporary setback in April, a strong recovery occurred in May, as potential demand for trade routes less affected by tariffs remained strong.

"Belt and Road" countries will grow strongly in the future

We feel that merchants are more willing to increase their investment in other non-US regions, especially in the Belt and Road countries, rather than transferring sales back to the domestic market. As more Chinese brands/merchants actively adjust their supply chain and market layout, the ASEAN market has performed outstandingly, which may support the years of active development of the supply chain and enable local e-commerce (such as) to capture the rising online penetration and monetization opportunities well.

On the other hand, shipments of T86 (formerly low-value goods below the minimum tax exemption) have dropped sharply since April, with the greatest impact on cross-border e-commerce platforms such as Temu and Shein, prompting them to shift more aggressively from the full consignment model (FCM) to the semi-consignment model (HCM). We noticed that Temu's HCM category expansion is faster than expected, but the lower monetization rate and additional fulfillment subsidies (the last mile) may still drag down Pinduoduo's transaction revenue at present.

Strong upward cycle of cross-border logistics

It is worth noting that our expert interviews show that the price of freight forwarding business (for example, 4-5 times higher than before the "Liberation Day" level) and transaction volume surge, while demand for overseas supply chain management in major cross-border markets is also booming. Based on SF Holdings' leading position in the Asian market and higher expectations for international supply chains, we upgraded its rating to "outperform the market".

Figure 2 - Macquarie China Internet Coverage Stocks

(Note: TP is the target price; OP is "outperforming the market"; N is "neutral", UP is "underperforming the market"

Current share price as of June 3, 2025; share price is denominated in local currency)

Since most exports are carried out through the "1039" market procurement trade method, the impact of tariffs on Yiwu is limited.

The overall impact of tariffs on Yiwu's exports is relatively limited. Export growth was slightly affected in April (20% year-on-year), while export growth was much higher in March/May, at 719%/499% respectively. There are three main reasons for this difference:

Overall, the United States has limited exposure, accounting for about 15% of export GMV, while more than 60% of GMV is targeted in the Belt and Road countries. Of the 65,000 merchants in total, only about 5% are engaged in U.S. export/trade. Nevertheless, U.S. export GMV showed strong year-on-year growth of 45% as of May.

The cancellation of tariffs and minimum exemption exemptions has had a more significant impact on trade under the 0110 model (14% of Yiwu's exports) and the 9610 model (1% of Yiwu's exports). However, 85% of Yiwu's exports adopt the 1039 market procurement trade model.

1039 Model: Market procurement trade model, designed for SMEs, allows qualified entities to export goods purchased from state-approved market clusters, with a maximum value of USD 150,000 per customs declaration (link).

0110 Model: General trade model, suitable for import and export of goods between enterprises (B2B) in conventional international trade. These larger amounts of products are mainly used for orders from large organizations such as supermarkets in the United States, as well as from large and medium-sized manufacturers with standard compliance requirements.

9610 Model: Cross-border e-commerce small package model, widely used by merchants that supply cross-border e-commerce platforms.

Strong growth in non-US regions, as importers from other countries expect Yiwu to be affected by tariffs and have come to Yiwu for opportunities, which promotes stronger organic offline traffic.

Overall, according to our expert opinion, the impact of tariffs on Yiwu merchants is controllable, and Yiwu merchants do not expect the high tariff environment to continue, so it is unlikely that their trade model will be easily changed.

Temu: HCM expands rapidly due to the cancellation of the minimum tax exemption, but the price increase is limited and logistics subsidies are more

According to our cross-border e-commerce experts, the cancellation of the minimum tax exemption policy has significantly affected the cost structure of the full consignment model (FCM) sales, eroding merchants' gross profit margins, causing the US FCM contribution to plummet from 70% at the beginning of 2025 to 50% in April, and global sales fell by 20% (which is also reflected in the decline in sales of cross-border logistics suppliers).

To fill the commodity shortage caused by the decline in FCM, Temu is trying to rapidly expand the half-consignment model (HCM) by providing additional fulfillment subsidies (up to 35% of the total fulfillment cost) and establishing official overseas warehouses, in an attempt to convert more FCM merchants to HCM.

While only a limited number of FCM merchants have turned to HCM because it requires stronger supply and operational capabilities and brings significant inventory risks, HCM now contributes 80% of the US GMV. Previously, HCM merchants focused more on larger sizes (>3 kg) and higher-priced items as they shipped by sea, but our experts saw more product categories, especially smaller and lighter products (such as clothing, small electronics) sold through HCM and expected HCM to exceed most of the FCM share in the future.

In terms of pricing, since the cost structure of HCM is higher than that of FCM through T86, Temu still maintains a price advantage of about 10%-15% over Amazon for similar products. However, as Temu's target users are more price-sensitive, previous experimental price increases have led to a significant decline in sales. Our experts believe that there is room for further price increase for HCM products in the short term.

As the U.S. government takes action to tighten its package exemption policy, our cross-border e-commerce experts believe that other regions, including Europe, Japan and Brazil, are stronger likely to undergo similar policy changes. Therefore, the expert believes that this may lead to wider structural changes in cross-border e-commerce platforms.

"Export to domestic sales" is easier said than done

According to US tariff rules, multiple e-commerce platforms provide additional product channels called "export to domestic sales", hoping to help export companies through external fluctuations. The Ministry of Commerce and other government agencies also expressed their support for promoting the integration of domestic and foreign trade.

However, our trade experts say that "turning to" domestic exports is much more difficult than just getting some traffic support from e-commerce platforms:

Exported goods usually have a higher cost structure, which also means higher selling prices (may be much higher than the domestic pricing range). Exporting companies may have to cut profits drastically and even sell at a loss to clear inventory.

Exported goods are usually not widely recognized by domestic consumers. In the already fiercely competitive market, high-quality domestic goods are sufficiently supplied, and unknown exported goods are difficult to obtain sales and recognition.

As a result, many manufacturers and exporters were unable to switch to intraday sales, with order volumes declining since April. Some of these companies have to shut down production intermittently, which may extend the factory shutdown if the tariff situation worsens.

Freight forwarding prices rise due to short-term U.S. demand; partially demand turns to ASEAN

After President Trump's "Liberation Day" announced tariffs on April 2, the overall demand for shipping to the United States dropped sharply to almost zero. Freight forwarders then adjusted their freight routes to shift capacity from the United States to the Middle East and Europe.

However, our freight forwarding experts saw that after the announcement of a 90-day temporary ceasefire in the Sino-US trade war on May 12, demand for sea freight to the United States surged immediately, which also drove freight costs up by as much as 4 times. Given that there was a one-month window in April and the potential uncertainty after the 90-day ceasefire, cross-border merchants are now pushing for production and shipment of existing products to ensure months of inventory, but they are reluctant to launch new products due to low visibility. Therefore, our experts expect that by early and mid-June, freight demand and prices to the United States will remain high and then gradually decline after restocking.

Meanwhile, some domestic merchants are shifting some supply chains to Southeast Asian countries (such as Vietnam, Thailand, Cambodia, Malaysia) to deal with future geopolitical risks. Our experts have seen strong growth in demand for freight forwarders to these countries, from early construction materials to production of raw materials, which has also driven freight prices to rise by about 2 times, or even as high as 4 times. Supply chain migration can be a process over the years. Our experts believe that as more freight forwarders join these routes, freight prices to ASEAN countries will show an upward trend in the short and medium term, and overall capacity will also increase.

2. The second day of the trip to Hangzhou in China’s Internet Industry: Building a multi-pillar future for artificial intelligence

Ecological flywheel effect

We reaffirm our optimistic view of companies with a strong ecosystem that can cover a wider range of verticals and increase user duration. By integrating AI into existing content loops and refactoring workflows, we have observed a range of improvements—including recommendation algorithms, advertising tools, content generation, and more—all driving consumer, enterprise, and developer adoption. It is worth noting that the leading Internet giants have formulated a clear AI strategy: Tencent focuses on the AI/application layer of the intelligent body, while Alibaba focuses on cloud AI infrastructure. We believe that this differentiation will help reduce homogeneous competition and drive industry growth and innovation for many years.

Promising prospects for cloud computing

Overall, public cloud demand (especially AI-related demand) continues to maintain a positive trend, and compared with overseas CSPs such as AWS and Azure, infrastructure as a service (IaaS) may still occupy a more important share of revenue. Since the breakthrough progress in in-depth search () , experts in the field of AI/cloud have noticed a surge in demand for AI/cloud among enterprises in various industries, ranging from digital and Internet industries, financial services and state-owned enterprises to traditional industries such as agriculture and manufacturing. At the current stage, AI-related revenue mainly includes: 1) token use; 2) existing product upgrades; 3) model-context-protocol (MCP) and new product modules, among which the last two types of revenue streams are expected to become more important sources of profit contribution in the medium term.

The rise of AI for agents

Although universal AI agents are gradually gaining attention, experts believe that vertical agents remain key disruptors in segmented workflows given more professional industry knowledge and databases. In fact, many Internet platforms have launched a variety of AI agents, from travel agents launched by Ctrip, the largest online travel platform, to function-based programming agents such as Alibaba's Tongyi Lingcode and Baidu's. In addition, as technology giants try multi-agent systems (“agent universe”), cross-ecosystem integration remains fragmented, which has promoted the accelerated application of MCP.

Risk warnings for major companies covered

Tencent (700 HK; share price of HK$512.00; outperform the market; target price of HK$661.00)

The growth rate of macroeconomics is lower than expected may suppress the growth prospects of advertising/fintech business; potential regulatory risks in the gaming industry may delay the launch of major game version numbers; major investors reduce their holdings; competition in the advertising/game field intensifies.

Alibaba (BABA US/9988 HK; share price of US$119.52/HKD 114.60; outperform the market; target price of US$187.50/HKD 182.30)

China's macroeconomic trends and policy support are lower than expected; potential geopolitical risks may seriously affect overseas businesses; market share loss in various business lines accelerates and profitability declines.

Baidu (BIDU US/9888 HK; share price US$85.21/HKD 83.05; neutral; target price US$85.00/HKD 88.00)

The impact of the US chip ban on Baidu's AI business has expanded; the process of AI monetization is faster/slower than expected; competition for core advertising demand is intensifying.

Ctrip Group (TCOM US; stock price $61.89; outperform; target price $74.50)

Macroeconomic uncertainty may affect the pace of consumption recovery, especially for middle-income groups; fierce market competition may lead to market share loss; outbound flight capacity recovery is lower than expected; major shareholders reduce their holdings.