Market Overview
The offshore Chinese equity market experienced a strong rebound last week, driven by significant momentum in artificial intelligence (AI). The MSCI China Index surged by 7.1%, with standout performances from the communication services sector (+10.1%), consumer discretionary sector (+11.1%, led by internet and platform companies), and the IT sector (+3.7%). Similarly, the Hang Seng Tech Index jumped by 7.3%. Liquidity inflows were a key driver, with Southbound Stock Connect contributing USD20 billion year-to-date, primarily directed toward AI application-related industries, such as internet, consumer electronics, and autonomous driving.
From a macroeconomic perspective, China’s January credit data outperformed expectations, with Total Social Financing (TSF) reaching CNY7.1 trillion—9% higher than consensus estimates. This was supported by robust new loans and strong government bond issuance. Additionally, a rebound in demand deposits and a delayed rate cut are expected to alleviate banks’ net interest margin (NIM) pressures. Positive developments in the real estate market also bolstered sentiment, including a potential government liquidity injection plan for Vanke, which could benefit both banks and the real estate sector.
Company Deep Dive Analysis
Tencent Holdings Ltd (700 HK)
Tencent has demonstrated significant advancements in AI integration, particularly through its Weixin platform. The recent testing of DeepSeek-R1 within Weixin Search offers users a diversified experience and could unlock monetization opportunities in search, advertising, and Video Accounts. The company’s ad tech upgrades have already increased click-through rates, leading to an 18% year-on-year (YoY) growth in ad revenue expected for 2024, despite macroeconomic challenges.
Valuation: Tencent trades at 20.9x 2024E P/E and 18.7x 2025E P/E, with a dividend yield of 1.0% in 2024E and 1.1% in 2025E. The return on equity (ROE) is projected at 21.5% in 2024 and 20.3% in 2025.
Alibaba Group Holding Ltd (9988 HK / BABA US)
Alibaba continues to lead in AI innovation, with its Qwen2.5 model reducing API pricing and fostering app ecosystem development. The partnership with Apple to integrate Alibaba’s AI into iPhone 16 models highlights its technological advancements and could attract more developers to its Cloud and AI platforms. Alibaba is also focusing on enhancing domestic e-commerce fundamentals and shareholder returns. The company’s upcoming quarterly results on 20 February will be crucial, with management updates expected on these key areas.
Valuation: The Hong Kong-listed shares trade at 14.6x 2024E P/E and 13.0x 2025E P/E, with a dividend yield of 0.7% in 2024E and 0.8% in 2025E. Its U.S. ADRs are similarly valued. ROE stands at 12.3% for 2024 and 2025.
Xiaomi Corporation (1810 HK)
Xiaomi has emerged as a key player in AI applications within the consumer electronics space. The firm is expected to benefit significantly from Southbound Stock Connect inflows. While its near-term valuations appear stretched, the company’s strong position in the AI-driven hardware market underscores its long-term potential.
Valuation: Xiaomi trades at 42.9x 2024E P/E and 35.8x 2025E P/E, with a dividend yield of 0.0% and an ROE of 12.1% in 2024 and 14.0% in 2025.
BYD Company Ltd (1211 HK)
BYD, a leader in the autonomous driving and electric vehicle (EV) sectors, is well-positioned to benefit from AI adoption in automotive technology. The company’s growth trajectory remains promising as it aligns with China’s broader push for technological innovation.
Valuation: BYD trades at 25.0x 2024E P/E and 19.7x 2025E P/E, with a dividend yield of 1.1% in 2024E and 1.3% in 2025E. ROE is projected at 24.0% in 2024 and 24.8% in 2025.
JD.com Inc (9618 HK / JD US)
JD.com is focusing on integrating AI into its e-commerce and logistics operations to enhance efficiency and user experience. Its fundamentals are improving, supported by a strong domestic e-commerce recovery.
Valuation: The Hong Kong-listed shares trade at 10.5x 2024E P/E and 9.6x 2025E P/E, with a dividend yield of 2.3% in 2024E and 2.5% in 2025E. Its U.S. ADRs have similar metrics.
NetEase Inc (NTES US)
NetEase is leveraging AI to enhance its gaming and digital content offerings. The company’s strong focus on innovation positions it as a key beneficiary of AI-driven growth in the entertainment sector.
Valuation: NetEase trades at 15.4x 2024E P/E and 14.4x 2025E P/E, with a dividend yield of 2.0% in 2024E and 2.2% in 2025E. ROE is projected at 22.4% in 2024 and 21.8% in 2025.
Foxconn Industrial Internet (601138 CH)
Foxconn is a critical player in the AI hardware and infrastructure space, benefiting from increased investment in semiconductor and AI-related technologies. Its diversification efforts and focus on AI enablers position it for sustainable growth.
Valuation: Foxconn trades at 18.7x 2024E P/E and 14.5x 2025E P/E, with an ROE of 16.0% in 2024 and 18.5% in 2025.
Baidu Inc (BIDU US)
Baidu remains a leader in AI software and applications, with a focus on search, cloud, and autonomous driving technologies. Its innovations in AI-driven ecosystems continue to attract investments and partnerships.
Valuation: Baidu trades at 9.9x 2024E P/E and 10.1x 2025E P/E, with an ROE of 8.5% in 2024 and 7.3% in 2025.
Will Semiconductor Co Ltd (603501 CH)
Will Semiconductor is a key beneficiary of China’s push for AI-enabled hardware, particularly in the semiconductor sector. Its growth is supported by strong demand for advanced chips and components.
Valuation: The company trades at 48.8x 2024E P/E and 35.4x 2025E P/E, with an ROE of 14.0% in 2024 and 16.4% in 2025.
Shennan Circuits Co Ltd (002916 CH)
Shennan Circuits is a prominent player in the printed circuit board (PCB) market, benefiting from increasing demand driven by AI and semiconductor applications. Its strategic positioning ensures long-term growth opportunities.
Valuation: Shennan Circuits trades at 38.3x 2024E P/E and 31.1x 2025E P/E, with an ROE of 13.8% in 2024 and 15.0% in 2025.
