Could DeepSeek lead to re-rating of Chinese equities?

The Chinese stock markets had a good start in the Year of the Snake, with both onshore and offshore Chinese equities rising as stock trading resumed after the Chinese New Year holiday. The positive sentiment followed reports that DeepSeek, a free AI-powered chatbot designed by a Chinese AI startup, is able to achieve competitive performance compared to top-tier overseas AI counterparts at a fraction of the cost.

While we believe that DeepSeek is a game-changer for China’s AI development, the key question now is whether DeepSeek is merely a tech breakthrough for China or if it could indeed be a catalyst for a re-rating of Chinese equities. We believe that the various benefits brought by DeepSeek, including higher efficiency, cost savings, strong computing power, and a much lower barrier for various industries to use AI, could benefit many listed companies in China and eventually lead to a re-rating of Chinese stocks.

China’s AI breakthrough is set to benefit various sectors 

DeepSeek generated significant hype over the Lunar New Year with its low-cost, high-performing, open-source Large Language Models (LLM). DeepSeek has made AI technology more accessible to various industries and has caused significant market excitement, highlighting its potential to bring innovations. The DeepSeek breakthrough could benefit various sectors in the stock market, enhancing productivity and revenue for many potential AI technology beneficiaries.

The application of DeepSeek will further boost businesses like e-commerce, cloud services, AI smartphones, AI laptops, consumer electronics, semiconductors, and the auto industry. China's autonomous driving technology and humanoid robotic technology have strong capabilities, and these two areas are set to benefit from China’s AI breakthrough, especially with stronger computing power.

A rerating opportunities for Chinese equities 

Currently, Chinese equities are trading at 10x PE, a discount of 55% compared to the US market.¹ Meanwhile, China tech stocks are trading at a 40% PE discount compared to the US market.² In terms of valuations, H shares are much more attractive compared to A shares. 

Notable increase in market confidence in China’s innovative capabilities

Industries leveraging AI can improve efficiency in production, leading to earnings growth. There is a case for potential re-rating, especially for Hong Kong-listed Chinese stocks, where valuations are much more attractive. Their earnings outlook could improve along with the continuous development and application of AI. We believe that with an improving outlook on the Chinese economy and corporate earnings led by China’s AI development, current valuations could be an attractive entry point for Chinese equities.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.