Why does AI revenue growth still create financing pressure?

  • AI commercialization is easiest to measure at cloud and computing-power providers: Alibaba’s external cloud revenue grew 45% year on year in the first quarter of fiscal 2026, with AI-related products accounting for 35% of external cloud revenue. Application-focused companies benefit more through improved recommendations, advertising and operational efficiency.
  • Accelerating spending is concentrated mainly among infrastructure platforms. Alibaba and Tencent’s combined capital expenditure in the second quarter of 2026 or the quarter ended in June was approximately 120 billion yuan, directed to data centers, servers, chips and computing power, among other areas. By the end of June, Alibaba had spent half of its three-year 380 billion yuan plan.
  • Barclays believes commercial progress is narrowing the timing gap between revenue and investment, but most issuers remain in the buildout phase. The stronger a company’s ongoing operating cash flow, the more room it has to fund investment itself and arrange external financing flexibly.

Where does Baidu’s funding gap come from?

  • Baidu’s operating cash flow in the second quarter of 2026 was 3.4 billion yuan, below its 11.4 billion yuan of capital expenditure. Total revenue fell 4% year on year, and its traditional businesses were under pressure. Barclays expects advertising to remain under pressure over the next few quarters, potentially offsetting increased profits from cloud operations.
  • Assuming annual capital expenditure of approximately 23.6 billion yuan in each of fiscal 2026 and 2027, a minimum cash balance of 100 billion yuan and continued shareholder returns, the bank estimates cumulative gross financing needs of approximately 9 billion yuan and 34.8 billion yuan, respectively. After deducting relevant debt maturities, cumulative net financing needs are approximately 4.6 billion yuan and 28.7 billion yuan, respectively.
  • Barclays downgraded Baidu’s credit rating from equal weight to underweight. Higher AI cloud margins, stabilization in advertising, lower capital expenditure or shareholder returns, and external financing for Kunlunxin could all ease funding pressure.

How do the funding consequences of Alibaba’s and Tencent’s large investments differ?

  • Alibaba’s recent share placement and earlier convertible bond issuance have extended its funding runway. Barclays estimates no need for new financing in fiscal 2027, with a potential gap in fiscal 2028.
  • Alibaba’s operating cash flow for the quarter ended in June 2026 rose 11% year on year to 22.9 billion yuan, but capital expenditure of 67.7 billion yuan left quarterly free cash flow negative at 44.7 billion yuan. Higher cloud margins, substitution with self-developed chips, and faster improvement in losses from AI applications and instant retail would help narrow the gap.
  • Barclays maintained its overweight credit rating on Tencent, judging it the best placed among companies it covers to absorb AI buildout spending over the next 15 months. Games, advertising and cloud provide recurring cash sources. Tencent’s net debt rose and free cash flow was negative in the second quarter, mainly reflecting concentrated capital expenditure, advance payments for computing-power purchases and dividends.
  • Tencent’s management believes higher AI capital expenditure is concentrated in 2026–2027. Purchases and advance payments precede monetization and will continue to create near-term free cash flow volatility.

How large are other companies’ funding buffers?

  • Kuaishou is adequately funded under Barclays’ base case, but its buffer is thin. In the second quarter of 2026, gross margin fell to 51.6% from 55.7% a year earlier, while research and development spending rose 34.2% year on year to 4.6 billion yuan. Front-loaded capital expenditure and financing for Kling AI help ease pressure, while continued shareholder returns consume funding capacity.
  • Lenovo has more funding headroom. Barclays expects its operating cash flow to rise from 4.1 billion US dollars in fiscal 2026 to 6.9 billion US dollars in fiscal 2028, enough to cover annual capital expenditure of approximately 1.3 billion–1.5 billion US dollars and growing dividends. However, AI server growth is driving up inventory and receivables, contributing to weak cash conversion in the latest quarter.
  • Meituan and Xiaomi also have substantial liquidity headroom. Meituan’s free cash flow is affected by subsidies, rider costs and expansion investment; Xiaomi must also meet funding needs for electric vehicles, AI and international expansion.

How might future financing share the cost of the buildout?

  • Barclays expects companies needing funds to use a mix of bank financing, US dollar or offshore renminbi bonds, convertible bonds and share placements as opportunities arise. They may also reduce buybacks to preserve cash. Bond issuance may fill funding gaps or support refinancing or advance fundraising.
  • As overseas demand for data centers and GPUs expands, technology companies may also use infrastructure as tenants or long-term buyers, with operators or project companies bearing construction investment and debt. Arrangements such as long-term leases and capacity reservations can support project financing and enable data center operators and project vehicles to become new bond issuers.