The rise of Chinese AI startup DeepSeek is forcing investors to re-evaluate the nation’s leading internet companies and their potential to capitalize on artificial intelligence that’s boosted global peers.
Market watchers are increasingly touting how the AI model will be a game changer for Chinese tech companies and their stocks, which have remained under pressure by concerns over the economy. Already Alibaba Group Holding Ltd. shares surged last week over such hype, with a gauge of tech stocks entering a bull market on Friday.
“The refreshed attention could shift investor focus from ‘thinking about risks’ to ‘thinking about potential’ when they look at the large Chinese internet names,” said Jian Shi Cortesi, a portfolio manager at Gam Investment Management in Zurich. “This is positive, especially given the big valuation discount of these names compared to US peers,” she added.
The upcoming results season may provide stock catalysts in the form of management comments on progress with AI models and demand for cloud services. Meanwhile, options traders have boosted bets on China tech, and the stocks remain historically cheap.
The Hang Seng Tech Index entered a bull market after last week’s 9% gain. Still, the gauge of Hong Kong-listed Chinese tech stocks is trading at less than 17 times estimated forward earnings, below the Nasdaq 100’s 27 times and even its own five-year average of 25 times.
Multiples for China’s tech stocks have suffered from weak demand among domestic consumers as well as intense competition in their e-commerce and cloud businesses. That comes as geopolitical tensions with the US have also reduced global appetite for the nation’s equities.
“The lack of foreign investor interest and liquidity in the market was one reason it was a value trap,” said Alex Au, managing director at Alphalex Capital Management HK Ltd. “Now, DeepSeek has significantly aroused international investors’ interest in Chinese tech again and should help narrow the valuation gap.”
The excitement extends beyond the startup level, with Alibaba announcing the latest version of its AI model just days after DeepSeek’s release, and touting even better results. That drove its Hong Kong-listed shares up 13% last week. Competing offerings from other majors include Tencent Holdings Ltd.’s Hunyuan, Baidu Inc.’s Ernie Bot and ByteDance Ltd.’s Doubao.
The latest wave of services should accelerate AI adoption by enterprises as well as consumers, while also reducing costs for hyperscalers. It also means a boon to cloud service providers like Alibaba and Tencent, given that users rely on cloud computing to run AI infrastructure.
“The much cheaper and capable model introduced by DeepSeek should help democratize AI in China and encourage usage and spending,” said Alphalex Capital’s Au. “We think the cloud operators like Alibaba will be major beneficiaries.”
Cloud business growth for Chinese hyperscalers has lagged that of major US peers so far. Analysts estimate cloud revenues for the December quarter rose 9.7% from a year ago at Alibaba and 7.6% at Baidu, compared with 19% at Amazon.com Inc. and 31% at Microsoft Corp.
China’s tech stocks still face pressure from US tariffs on e-commerce shipments as well as Washington’s efforts to restrict the Asian nation’s access to the most advanced chips. But DeepSeek has helped show that the focus isn’t always on highest level of technology.
Options bets on the Hang Seng Tech Index have been on the rise, with volumes touching their highest level since early October on Friday. About 6,500 bullish contracts traded that day, almost double the number of puts. June 6,000 calls, which have a strike price 16% above Friday’s close, were the most active.
“There has been a particularly disappointing investment story for Tencent and Alibaba for many years now,” said Richard Clode, a portfolio manager at Janus Henderson. “We’re looking for that new narrative to get excited about and now we’ve got one, which is actually a very credible player in AI.”
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