Recently, China stocks have seen a strong rally, particularly in the tech industry. The Hong Kong tech index has surged over 26% YTD, significantly outperforming US tech stocks, with the Nasdaq 100 index delivering only a 5% YTD gain.
The primary reason for this outperformance is the emergence of DeepSeek, followed by other Chinese tech businesses, such as Alibaba’s Qwen 2.5, which continue to beat standards and reducing cost. Many of these businesses have integrated DeepSeek’s model one way or another into their business operations, leading to strong investor demand for their stocks.
The rapid emergence of new models along with their tight release schedules, such as Qwen 2.5 being released on 29 January, Lunar New Year, highlight China’s urgency in keeping pace with their US counterparts. This has led to a change in investment narrative where investors are questioning the need for large capex spending to maintain dominance in the AI and cloud computing domain.
This shift has provided Chinese businesses with some breathing room, and has also shone light on their progress, leading to the revaluation of Chinese stocks and a mean reversion for many.
There are a couple of key trends that we can observe from the top-performing stocks in the Hang Seng Tech Index. AI, EVs and consumer related stocks take the spotlight as major growth opportunities in China investment landscape. We can segment investment plays under these themes to better understand how we can diversify our portfolio to capture the growth in Chinese tech businesses.
Cloud and Enterprise solutions sector
Kingdee (HK:0268) and Kingsoft (HK:3999), both operating in the cloud and enterprise solutions sectors, have seen strong growth.
Kingdee is a market leader in the enterprise resource planning (ERP) software space in China, holding a dominant position, particularly among small and medium-sized enterprises. The company offers scalable and cost-effective solutions across various sectors, including manufacturing, retail, and logistics. Additionally, Kingdee has expanded globally, providing services such as financial management and supply chain optimization.
On the other hand, Kingsoft is a leading software development company, known for its products in office software, cloud computing, and internet security. Its Kingsoft Office suite competes directly with Microsoft Office, gaining significant popularity in China due to its cost-effectiveness, Chinese-language support, and local customisation. The Chinese government has further supported Kingsoft’s growth, encouraging the use of domestic office software over Microsoft products for privacy reasons. Kingsoft is also involved in cloud services, online gaming, and AI research, positioning itself as a key player in China’s rapidly expanding tech landscape.
While Kingdee and Kingsoft are competitors in certain areas, they both lead the charge in cloud computing and enterprise solutions, playing a vital role in China’s growing technology sector and its broader AI ambitions.
Chip industry
SMIC (HK:0981) and Hua Hong Semiconductor (HK:1347) are market leaders in China’s semiconductor industry, each specialising in different sectors but both playing crucial roles in the country’s technological ambitions.
As China’s largest semiconductor foundry, SMIC specialises in the production of integrated circuits (ICs) and offers manufacturing services for global clients. SMIC is key to China’s efforts to build a self-sufficient semiconductor industry, focusing on advanced technologies like 7nm and 14nm processes. However, U.S. sanctions restricted access to advanced chip making equipment, forcing SMIC to adapt, with substantial government support backing its efforts. Despite these challenges, SMIC’s success is critical to China’s tech sovereignty and its long-term goal of reducing reliance on foreign chipmakers, which is seen as a national security vulnerability amidst ongoing geopolitical tensions.
On the other hand, Hua Hong Semiconductor specialises in producing specialty chips, such as analog and mixed-signal chips, which are vital for industries like automotive, consumer electronics, and communications. These chips are used in devices requiring specific functions, such as power management and sensors. Hua Hong’s expertise in these areas is crucial as China aims to develop a competitive advantage in emerging sectors like automotive electronics, 5G communications, industrial automation, and the Internet of Things (IoT). The company’s products are also integral to the development of smart devices.
Both SMIC and Hua Hong are central to supporting China’s “Made in China 2025” initiative, which focuses on advancing AI, autonomous vehicles, 5G, and other cutting-edge technologies that heavily rely on semiconductors. These companies provide the necessary chips for innovation and development, helping China achieve its strategic goals of technological self-reliance.
Consumption related businesses
There is a large focus on consumption as the Chinese economy transitions to a consumption driven economy. These businesses are the market leaders or one of the top businesses in their field. All these businesses incorporate AI or cloud computing in their products and services, allowing them to capitalize on the AI trend.
Below is a short description of these businesses and the products that they provide to the market.
- BYD Electronics (HK:0295): A subsidiary of BYD Company, BYD Electronics is a global leader in the production of mobile device components, such as batteries, touchscreens, and cameras. It also manufactures LCD panels, battery modules, and other electronics for consumer products. As a major supplier to global brands, BYD Electronics plays a key role in the mobile phone components and battery solutions market. In addition, it provides intelligent manufacturing solutions and is expanding into electric vehicle-related products and other tech-related fields. BYD Electronics have emphasised a focus in “AI smartphones” which will bring long term growth opportunities for the business. Its AI servers also currently only represent a small proportion of the business and it has partnered with Nvidia to mass produce “AI server products”.
- XPeng (HK:9868): XPeng is a prominent Chinese electric vehicle (EV) manufacturer that designs, develops, and manufactures smart EVs. The company offers a range of models that integrate advanced AI and autonomous driving technologies, positioning itself as a leader in next-generation mobility. XPeng is competing in the rapidly growing EV market, with a focus on technology-driven vehicles. It competes with both traditional automakers and other EV companies like Tesla, contributing to the growing electric vehicle ecosystem. XPeng’s recent launch of its AI-driven vehicle into the UK market is significant for its global expansion and a positive news for investors.
- Ali Health (HK:0241): A subsidiary of Alibaba, Ali Health is at the forefront of digital healthcare in China. The company leverages AI, big data, and cloud computing to transform healthcare delivery. It provides services such as online medical consultations, pharmacy e-commerce, and health management solutions. Ali Health aims to improve access to healthcare and promote digital health by utilizing Alibaba’s technology and data capabilities, supporting China’s growing demand for advanced healthcare solutions.
- Xiaomi (HK:1810): Xiaomi is a global leader in affordable, high-quality consumer electronics, particularly smartphones, smart home devices, wearables, and IoT products. Known for its wide product range at accessible price points, Xiaomi has dominated markets, particularly in developing countries. The company’s MIUI operating system and ecosystem of interconnected smart devices have made it a significant player in the IoT space and contributed to its recognition as a major global technology brand. Its ventures into EV have also been significant with many good reviews, positioning it as a significant player in consumer electronics. Xiaomi has mentioned that it will bring Deepseek into its HyperOS system which proves to be another catalyst on top of its strong growth momentum driven by consumption of its products.
- Lenovo (HK:0992): Lenovo is one of the world’s largest manufacturers of personal computers, laptops, and servers. Known for its ThinkPad laptops, Lenovo is a key player in the business computing market. Additionally, the company specializes in enterprise solutions, including cloud computing, AI, and data storage systems. As a global technology company, Lenovo is central to China’s push to create a self-reliant computing ecosystem and remains a key player in both the consumer and enterprise technology markets worldwide. Lenovo has also integrated Deepseek model into its Xiaotian AI assistant in its PCs.
- Sunny Optical (HK:2382): Sunny Optical is a leader in optical lens production, manufacturing high-quality lenses for a range of applications, including smartphones, cameras, automotive systems, and industrial equipment. The company supplies major brands like Huawei and Apple, and it has expanded its capabilities to include components for autonomous vehicles and surveillance systems. Additionally, Sunny Optical is involved in producing critical optical components for augmented reality (AR) and virtual reality (VR) AI smart glasses. AR/VR is an important market that is garnering increasing attention with Meta CEO, Mark Zuckerburg, predicting smart glasses will replace phones by 2030.
Lastly, we have Alibaba Group (HK:9988), one of the world’s largest e-commerce and technology conglomerates, operating several major platforms, including Alibaba.com (B2B), Taobao (C2C), and Tmall (B2C). Beyond e-commerce, Alibaba has a strong presence in cloud computing (via Alibaba Cloud), digital entertainment, fintech (through Ant Group), and logistics. It is the market leader in both cloud computing and e-commerce in China, positioning itself well for continued growth in the domestic market. Recently, the launch of Qwen 2.5 and a partnership with Apple on AI technology have contributed to a remarkable 30%+ stock gain YTD. With management focused on streamlining operations—selling off loss-making assets like Sun Art—and sharpening its focus on core strengths in e-commerce and cloud computing, Alibaba is a stock to watch closely.
Final Thoughts
Overall, we believe that this is only the start of the rally in Chinese tech stocks. The current up trend was merely due to the catalyst of China’s emerging AI news with companies with obvious AI developments benefitting from the increased interest. A sustained growth and revaluation would require the support of strong earnings and fundamentals for 4Q24 which are due to report starting next week. The improved earnings will anchor the change in narratives and global optimism towards Chinese stocks.
We believe that there are 3 trends to focus on when looking for opportunities in China’s AI industry.
- Money flow from upstream businesses (chip production) to downstream (AI integrated services) as the industry matures.
- Initially, there will be concentrated outperformance in certain sectors within the AI industry such as chip producers. The growth will slowly be replicated across the industry.
- AI integrated services will gradually outperform in the future.
These 3 trends are drawn from observations in current Chinese and US markets. The chip production in China has garnered explosive performance with Cambricon Technologies, commonly known as China’s answer to Nvidia, gaining 367% over the last year. In the US, following Nvidia’s blockbuster performance, AI integrated services are gaining attention. These businesses like AppLovin, Palantir have delayed earnings growth compared to their upstream chip producer peers. Based on these observations, we believe that AI integrated services in China will generate strong growth in the coming years. Furthermore, most of the funds are currently concentrated in China chip stocks due to the government and national team’s efforts in supporting homegrown producers. There will be money rotation into these businesses when earnings and their respective industry solidifies. For now, most of these businesses like 4Paradigm, Sensetime, iFlytek are still in net losses, but keeping an eye on them would be beneficial.
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