AI frenzy drives Chinese tech valuations to multiples of US peers

Backing from Beijing and an investor frenzy have driven valuations of Chinese tech stocks far higher than US peers as the country’s AI sector emerges as a serious challenger to Silicon Valley’s global dominance.

Shanghai’s Star 50 index, which tracks the 50 largest and most liquid companies on the tech-focused Star board, has returned 29 per cent this year. It has handily outperformed the broader CSI 300’s 0.9 per cent gain and is well ahead of Hong Kong’s Hang Seng index, which is down 1.5 per cent.

The index is also trading around its most expensive levels since it launched in 2020. Even after a recent sell-off, the overall price-to-earnings ratio of the Star 50 is more than 150, well above the Nasdaq 100’s 35 in the US.

The sky-high valuations reflect a rush of enthusiasm from domestic investors who are still casting around for places to put their money following a painful housing bust.

But fund managers said it also represented a belief that China’s burgeoning AI industry could compete with deep-pocketed US rivals.

People are “making a bet on the Chinese ecosystem”, said Gary Tan, an emerging markets portfolio manager at Allspring Global Investments.

“To invest in this you just have to believe that China can catch up,” he said, adding that high expectations for Chinese AI were behind the “rich” valuations.

The launch of Moonshot’s Kimi K3 — China’s largest AI model to date, rivalling those of Anthropic — and the listing of homegrown chipmaker CXMT, which overtook Tencent as China’s most valuable company on Thursday, have underscored the country’s AI advances.

The upcoming listing of humanoid robotics group Unitree attracted more than 5,500 times the available allotment for retail investors, demonstrating the frenzy in China’s capital markets.

There is a “significant narrowing of leadership between China and the rest of the world as it relates to AI”, said Varun Laijawalla, an emerging markets portfolio manager at Ninety One.

The government has thrown itself behind the boom. China’s “national team” of state-backed funds swooped in to purchase equities after a global chipmaker sell-off this summer hit the country’s stocks.

Beijing’s increasingly urgent push for semiconductor self-sufficiency in the face of western export restrictions means the high valuations have been most concentrated in chipmaking, said Frank Benzimra, head of Asia equity strategy at Société Générale.

CXMT was initially backed by funds affiliated with the municipal government of Hefei in eastern China.

“We are seeing increasingly more local companies supplying other local companies,” said Benzimra, adding that strong earnings growth supported the high valuations. “This localisation process is an additional driver to the earnings.”

In the past year, China’s major exchanges have relaxed listing requirements for companies that are unprofitable but working on strategically important technologies.

More than half of listings in mainland China this year were in technology or industrial sectors, while in Hong Kong the proportion was even higher at 77 per cent.

Regulators have relaxed listing requirements for companies in strategically important industries

Shanghai’s Star board eases listing requirements for unprofitable companies

Shenzhen’s ChiNext board launches new listing standard for unprofitable technology groups

Hong Kong relaxes weighted voting rights rules for smaller companies

The looser listing requirements have driven valuations further. Companies that have listed in Shanghai this year have an average price-to-earnings ratio of 268 and a price-to-sales ratio of 43, compared with 67 and 22 respectively for companies listed last year.

China’s AI equity surge comes amid pronounced weakness in the overall economy, presenting a contradictory picture of technological supremacy and economic fragility. Beijing has sought to shift household savings from real estate to equities after the property market collapsed in 2022.

“The housing bust in China is as large as any we’ve seen,” said Idanna Appio, portfolio manager and senior research analyst at First Eagle Investments, adding that most property busts took a decade to recover from.

Weak domestic demand has hammered stocks linked to Chinese consumer sentiment, among them internet groups Alibaba and Tencent, whose shares have sunk 17 per cent and 26 per cent respectively this year.

Authorities appear unable or unwilling to provide meaningful stimulus to address lacklustre consumer demand. Instead, Beijing is hoping that “over time the new industries will replace the old industries and create high-value jobs”, said Chi Lo, a senior markets strategist at BNP Paribas.

The elevated valuations are also driven by the fact that Chinese tech companies are coming to market far earlier than their US counterparts because the country lacks deep-pocketed venture capital.

“There has been this tendency to list a company later and later” in the US, said Benzimra. “You had this ecosystem of private funds that had a lot of money.”

Recommended

James Wang, head of China equity strategy at UBS, said Chinese equity markets did not have as many longer-term investors as the US.

“Some of the biggest players like the mutual funds are quite short-term focused,” he said. “Given you’ve got a lot more shorter-term investors, it tends to have more crowding.”

Bullish investors such as Ninety One’s Laijawalla are betting that Beijing’s commitment to technology is likely to endure, anchored by President Xi Jinping’s focus on national security.

“If you think about national security, what is national security in China today? It’s tech leadership,” said Laijawalla.

“It’s a question of what you think normal is,” he added of the current investment environment in the US and China. “I don’t think there is normal these days.”