I have been bullish on major China tech companies this year, which many perceived to be well behind the US in the AI race at the beginning of the year.
Many of these major Chinese tech monoliths were selling for very low valuations that had been compressed by a severe five-year bear market. This fundamental backdrop has changed, but even with the recent re-rating, valuations still skew cheap and are well below similar counterparts in the US. I also like the starting point, given AI will complement already entrenched businesses that have solid, consistent revenues and earning power. For this reason, the recent advances in Chinese tech might have much further to run, with a comparative risk/reward skew advantage.
There is no sign of a bubble emerging yet in the Hang Seng Tech index. The index has recently broken through overhead resistance at 5,800, but remains around 50% below the previous peak near 11,000. The scope is open for further significant upside and recovery potential in the year ahead, in my view.
Bellwether Alibaba (which we hold across all our portfolios and is a top ten position in the Fat Prophets Global Contrarian Fund – as disclosed to the ASX) has surged to the highest level in nearly four years after revealing plans to ramp up AI spending past an original $50 billion-plus target in a global race for technological breakthroughs.
CEO Eddie Wu said this week that he anticipates overall investment in AI accelerating to some $4 trillion worldwide over the next five years, and Alibaba needs to keep up. He is totally correct on this front. Alibaba will soon add to a plan laid out in February to spend more $53 billion developing AI models and infrastructure over three years. Alibaba’s cloud division already has a head start with operations from the US to Australia, and with plans to launch the first data centre in Brazil, France and the Netherlands in the coming year.
Holding Alibaba might seem contradictory with what was discussed above, but we bought Alibaba and established a position on a PE multiple of around 10X existing earnings. This contrasts with some of the major US players, which sell for +30 to +40 times.
Alibaba rose as much as +10% yesterday as plans were outlined to roll out Qwen models and “full-stack” AI technology. The bullish reaction does point to global exuberance for all things AI, but the recovery potential for Alibaba and other leading Chinese tech stocks that were smashed during the bear market is considerable in my view. And the stocks themselves are lifting off what were very depressed valuations that didn’t reflect and were disconnected from the long-run growth potential of the Chinese economy. Growing corporate confidence amongst leaders in the Chinese technology space is therefore to be applauded.
This week’s breakout in Alibaba points to significant recovery potential and upside extension in the year ahead, now that an inflection has been fully confirmed. Support is well defined at HK$130 and below.
Mr Wu said yesterday that “the industry’s development speed far exceeded what we expected, and the industry’s demand for AI infrastructure also far exceeded our anticipation. We are actively proceeding with the 380 billion investment in AI infrastructure, and plan to add more.”
Total capital expenditure on AI infrastructure and services by Alibaba, Tencent, Baidu (all names we hold) and JD.com could top $32 billion in 2025 alone, according to Bloomberg Intelligence, which is a big increase on the $13 billion or so committed back in 2023. All of China’s internet majors are developing AI models and services at a rapid clip, including Tencent’s Hunyuan and Baidu’s Ernie. On Wednesday, Alibaba unveiled its new Qwen3-Max large language model and a series of other improvements to its suite of AI offerings.
The repositioning of Alibaba has already started to deliver, and in the most recent quarter, the company reported triple-digit growth in AI-related products. Its cloud division also posted a better-than-expected 26% jump in sales, making it the group’s fastest-growing unit. Alibaba has more than doubled this year, and is one of our best performers, but scope for further upside remains significant in my view. We hold Alibaba, Tencent, Baidu and other key China/Asia tech names in our Global and Asian managed account portfolios.
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