China’s growing influence in artificial intelligence (AI), as evident from DeeepSeek’s apparent success, has sparked renewed optimism in that country’s tech sector. The Hang Seng Tech Index climbed 1.8% on Friday, marking a 20% rebound from its January low. Leading the surge are Xiaomi Corp. and Alibaba Group Holding Ltd. (BABA), both rallying nearly 30% in that period, as they are seen as major beneficiaries of AI advancements.
DeepSeek, a Chinese startup developing AI models, grabbed headlines with the release of its new R1 model in late January. According to Yahoo Finance, the company revealed that training the R1 model cost just $5.6 million, significantly less than the $100 million required to train OpenAI’s GPT-4 model.
This raises important questions about AI investment and the potential rise of more cost-efficient AI agents, which could disrupt the current market dynamics. The DeepSeek revelation also reinforced China’s innovative capabilities in the tech sector (read: Will 2025 See Slowing AI Investments in Big Tech? ETFs in Focus).
“This sector has been overlooked, but there are bright spots,” said Sat Duhra, portfolio manager at Janus Henderson Investors in Singapore. “The DeepSeek announcement highlights how industrial policies like ‘Made in China 2025’ have propelled many industries toward world-class status,” as quoted on Bloomberg.
Alibaba’s stock has also gained momentum, thanks to the company’s assertion that its latest AI model outperformed Meta Platforms’ Llama and DeepSeek’s V3 in key tests. This success stands out in a market that has long been weighed down by regulatory challenges and policy uncertainties. Alibaba’s Accio, an AI-powered search engine for product sourcing, has attracted 500,000 small business users globally.
Baidu (BIDU), known for its search engine and Ernie chatbot, reported notable traction with its AI-integrated Wenku platform, which enables users to generate PowerPoint presentations and other documents quickly. As of 2023, the platform had 40 million paying users, contributing to a 60% year-over-year revenue increase.
Tencent (TCEHY) is preparing to integrate AI agents into WeChat, its popular messaging and social media app. CEO Pony Ma revealed the plans during a Jan. 13 address, indicating a push into AI-driven automation and user interaction.
Global investment banks are increasingly optimistic about China’s tech sector. Deutsche Bank analysts predict a major shift in global investment strategies, forecasting a surge of interest in Chinese stocks, per the above-mentioned Bloomberg article.
HSBC echoed this sentiment, suggesting that the valuation gap between China and emerging markets could narrow as foreign investments rise. “A-share tech companies could further benefit from policy support,” said Steven Sun, head of research at HSBC Qianhai Securities Ltd, as mentioned on Bloomberg. However, he pointed out that China’s innovation must translate into profitability, which requires demand-side stimulus.
Chinese technology companies are now value stocks courtesy of AI tailwinds and attractive valuations. The Hang Seng Tech Index trades at 17 times forward earnings estimates, significantly lower than the Nasdaq 100’s 27 times, according to Bloomberg data.
Alibaba’s P/B (Most Recent Quarter or MRQ) is 1.59X versus the underlying Internet – Commerce industry’s P/B of 1.77X. Price/Cash Flow (Most Recent Fiscal Year or MRFY) is 9.39X versus the industry measure of 16.87X. Price/Earnings (TTM) of the BABA stock stands at 11.71X versus the industry measure of 20.04X.
Baidu’s P/B is 0.81X versus the underlying Internet – Services industry’s P/B of 2.23X. Price/Cash Flow (Most Recent Fiscal Year or MRFY) is 4.97X versus the industry measure of 12.31X.
Despite the potential for growth, there are inherent weaknesses in the space. The tech sector’s reliance on government policies and the ongoing geopolitical tensions like the tariff war pose risks to the stability of investments. Plus, most Chinese tech companies’ growth rates are below their underlying operating industries.
China tech-based exchange-traded funds (ETFs) like KraneShares Hang Seng TECH Index ETF KTEC, Invesco China Technology ETF CQQQ, KraneShares CSI China Internet ETF KWEB and iShares MSCI China Multisector Tech ETF TCHI have added 9.5%, 5.8%, 6.9% and 5.1%, so far this year, respectively (as of Feb. 6, 2025).
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