- Pullback in the China AI hardware sector reflects a reset in valuation as investors adjust to the possibility of greater Nvidia chips access in China, reignited geopolitical risks, inventory overhangs, and share unlocks
- Chinese hyperscalers capex and AI-cloud business demands are accelerating; compute capacity is on the surge while tight usable accelerators, a near-95% SMIC utilisation rate, and HBM constraints point to bottlenecks rather than broad overcapacity
- The right stance is selective participation rather than absence; upon the valuation reset, prospective returns are better where deployments, profits, and balance sheets are more visible
- Favour (i) proven IC designers; (ii) localisation beneficiaries across foundries, memory, equipment, & materials; (iii) backlog-supported server vendors; and (iv) optic leaders with global demand and offshore capacity
Related Insights
Premium reset, rather than a break in thesis. China AI hardware has underperformed against global peers in the past quarter. Both Star50 and ChiNext recorded their worst quarterly declines, and names which are most tightly associated with the domestic accelerator and optical trade falling just as hard. The natural reading would be that the China AI build-out has been overbuilt, and the accelerator thesis has broken. However, this is not what the operating evidence shows. What was taken out, instead, is the scarcity premium attached to the first generation of “China Nvidia” narratives.
At its peak, the market was capitalising several assumptions at once: (i) sustained exclusion of Nvidia’s latest products; and (ii) a smooth conversion of policy into profits across a wide listed universe. These assumptions were tested together. Reports that Beijing was surveying demand for newer Nvidia parts reopened customer optionality. A Senate Bill naming Innolight and Eoptolink raised a separate geopolitical risk in optics. Inventories and share unlock reminded investors that strategic relevance itself is not sufficient, and an earnings model has to be established.
Spends intact. That said, the operating side of the story argues for staying with the cycle. For one, reported capex by China’s hyperscalers is decisively accelerating on the back of greater AI-related spending with the likes of Alibaba and Tencent set to break their initial guidance. Cloud businesses also show strong traction with Alibaba’s AI & compute and AI-related product revenue recording insatiable growth momentum. Localisation also serves as structural support with China’s domestically produced AI chips continuing to surge.
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