Could DeepSeek lead to re-rating of Chinese equities?

The Chinese stock markets had a good start in the Year of the Snake – both onshore and offshore Chinese equities rose as stock trading had resumed after the Chinese New Year holiday.

The positive sentiment came following reports that DeepSeek, a free AI-powered chatbot designed by a Chinese AI startup, is able to achieve competitive performance when compared with top-tier overseas AI counterparts at a fraction of the cost.

While we believe that DeepSeek is definitely a game-changer for China’s AI development, the key question now is – Is DeepSeek merely a tech breakthrough for China? Or this could be indeed 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 the 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.
• Application of DeepSeek will further boost business like E-commerce, cloud services, AI smartphone, AI laptop, consumer electronics, semi-conductor and auto, etc.
• China autonomous driving technology and humanoid robotic technology have strong capabilities. These two areas are set to benefit from China’s AI breakthrough, especially with stronger computer power. 

A rerating opportunities for Chinese equities 

Currently, Chinese equities are trading at 10x PE, a discount of 55% vs US market.¹ Meanwhile, China tech stocks are trading at a 40% PE discount vs US market (chart).²

• For A shares and H shares, in terms of valuation, H shares is much more attractive.
• Notable increase in market confidence in China’s innovative capabilities.
• Industries leveraging AI can improve efficiency in production and lead to earnings growth. 
• There is a case for potential re-rating, especially for Hong Kong listed Chinese stocks, in which the valuation is much more attractive. Their earnings outlook could improve along with the continuous development and applications of AI.

We believe that, with an improving outlook on the Chinese economy and corporate earnings led by China’s AI development, the current valuation 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.