[SINGAPORE] According to analysts at Morningstar, rapid adoption of artificial intelligence (AI) is expected to reduce long-term operational costs across multiple sectors in Asia.
“This highlights undervalued companies that may be revalued as viable cost-cutting measures improve revenue,” said Kathy Chan, senior associate equity analyst at Morningstar and Kaiwan, Asian equity market strategist.
Wang provided an example from Trip.com in response to a query from Business time Thursday (September 4th). The Singapore Headquarted online travel agency saw an improvement in the “better than expected” margin of approximately 200 basis points due to marketing efficiency due to improved targeting with AI. His target prices on the counter, listed on both the Nasdaq and the Hong Kong Stock Exchange, are USD 70 and USD 560 respectively.
However, such wins for AI-powered companies have negative aspects, including employee concerns about job safety and layoff risks. Speaking to BT on Friday, Morningstar analysts said the extent of these threats to existing workers differs depending on the specific nature of each industry.
There are five sectors in Asia. This allows us to understand the decline in labor costs and increase in sales leverage with AI.
1. Consumers
Chinese consumer companies are reducing labor and marketing costs with “soft topline results and uncertain demand outlook.”
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For example, they cited Food and Beverage Companies China Resources Beer and Inner Mongolia Yili. Their target prices were HK$38.50 and 34 yuan, respectively.
They also said that the Japanese beverage holding company Kirin's pharmaceutical business can use AI to reduce research and development costs. They set a rating of “low” uncertainty at the counter, with a target price of 2,500 yen.
Analysts explained that current repetition of cost reductions is primarily characterized by layoffs and budget cuts, and the higher margins leads to improvements in the foundation despite soft demand.
According to Jackie Tsang, a consumer analyst at Morningstar, these companies are already taking the next step to reduce costs using generated AI (genai), reducing marketing costs while maximizing production capacity.
Chan and Wang added: “Genai analyzes demand data and proposes how to spend a company's marketing budget. We expect not only lower AI drive marketing costs, but also use the same budget to increase customer engagement on different platforms.”
In addition to reducing sales and marketing costs, Morningstar analysts believe that companies in the consumer sector can use AI at their production facilities to maximize efficiency and reduce product costs.
Therefore, for analysts, both the consumer defense (drink production, discount stores) and consumer circulation (internet retail, travel agents) sectors are underestimated, and profitability has exceeded expectations.
2. Communication Services and Technology
As consumer companies wait for higher sales leverage than expected, personnel costs are being implemented in the communications and technology sectors.
For example, Kanzhun, a human resources company from China, saw a 75% increase in revenue despite only 8% growth in revenue. “They cited AI for most of the cost reductions as they cut 17% of labor since the beginning of this year,” Wang told BT.
Chinese internet company Baidu is another name that uses AI to reduce client advertising costs and allow them to target potential customers more efficiently, writing Chan and Wang.
Genai is also changing the way multimedia companies produce content, such as IQIYI and NetEase.
“Content costs tend to be one of the best products costs for these companies, but we should expect that they will decrease in the future, with performances that can significantly increase the total margin due to AI-generated videos and acting,” wrote an analyst at Morningstar.
“In this area, I like Tencent, Baidu and Netease.” They also believe they could run leverage improvements for companies with content streaming operations.
The target prices for Tencent and Netease are HK$800 and HK$264 respectively, with a “high” uncertainty rating at both counters.
3. semiconductor
Felixley of MorningStar Semiconductor Analyst pointed out that Genai is increasing chip production by automating chip design, verification and verification, and accelerates the development of next-generation nodes in the Asian semiconductor industry.
Chang and Wang added: “We believe that large companies that tend to be on the forefront of AI will make the most profitable on operating expenses.”
These names include Taiwan Semiconductor Manufacturers (TSMC), SK Hynix, Lux Share and Murata. Morningstar's target price for TSMC is $306, with a “medium” uncertainty rating, but TSMC also estimates that Lee will record around US$50 billion in net profit in 2025.
4. Financial Services
Chan and Wang need to make sure that as Call Center is being replaced by chatbots, the financial services sector will also be cutting labor costs.
“We already see changes being implemented in some fintech companies as AI is being used to determine loan approval,” they explained. “Banks not only improve operating leverage, they also improve insurance companies.”
They believe that large banks like HSBC, MUFG and DBS will be the first bank to cut costs by implementing AI.
Michael McDud, senior equity analyst at Morningstar, told BT that it means that AI-related process efficiency means the need for workers, but made it clear that he doesn't have a specific number.
“I don't think that absolute labor costs will decrease at any company given the rise in inflation and wages, but there is room for a lower cost/return ratio,” he said.
5. Healthcare
The healthcare department sees AI helping data processing in areas ranging from clinical trials to drug development.
Highlighted companies such as China's analytics-driven healthcare solutions provider YIDU Technology and online physician platform Medlive are already using big data as their core competency to engage in patient drug targeting and clinical trials.
“Some issues within the healthcare industry right now include the inability to develop medicines as the amount of data to process becomes increasingly cumbersome,” the analyst explained.
“We believe that companies that benefit from AI will include companies that perform genome sequencing, clinical trials and patient targeting.”
Impact on existing personnel
Morningstar analysts explained that while business AI usage often leads to the need for fewer human workers, direct reductions in talent are not always a core outcome.
“In the semiconductor and technology sector, the benefits of AI can be difficult to quantify as tech companies can combine cost savings through layoffs and employment, allowing them to invest in new sectors,” Lee said.
He noted that while AI could lead to fewer workers needed to optimize existing processes, “savings” will be reflected in reducing the time required to deploy the next generation of cutting-edge processes.
Morningstar's Equity Research Director (Asia) Lorraintan believes AI is designed to increase efficiency and productivity, resulting in more companies choosing not to hire replacements in the event of wear and tear, rather than active workforce cuts.
“But this also means that companies are likely not employing as many entry-level staff as they used to,” she added.
