The faltering of the global AI trade has resulted in the Chinese companies emerge as the biggest losers.
During the first half of the year, the Nasdaq-style Star50 index is down nearly 40%, becoming the world’s worst performing major tech gauge. Losses here have been led by MetaX Integrated Circuits Shanghai Co. and Moore Threads Technology Co., both of whom have shed around 50% of their value during this period.
A hardware-focused ChiNext index has also declined 36% during this period.
The move appears similar to the KOSPI in South Korea, which led the AI boom in the Asia-Pacific, and indices such as Star50 latched on to it, but the current unwinding has left many an investor bleeding. Back then, investors continued to ignore frothy valuations to bet on the global AI boom.
Also known as the “Chinese Nvidia”, Moore Threads shares had surged 500% on their debut in December last year. From a high 942 CNY, the stock is now down to 327 CNY.
Investors are getting increasingly wary of the future demand and earnings prospects of these companies, as they rely heavily on equity financing to fund their growth aspirations.
According to Gavekal Capital, it will be much harder for China to achieve its AI ambitions if its technology stocks remain under pressure for an extended period. They warned that in case this weakness extends for another six months, it will make fundraising difficult and also imply that the market is unimpressed with the technological progress made.
Between April and June, the Star50 index had outperformed even South Korea’s KOSPI, surging 75% during that period, and traded at 80 times forward earnings at its June 30 peak. The unwinding of the trade has made the same valuations now a concern for investors.
The Star50 now trades at 40 times forward earnings, compared to the KOSPI, which trades at less than five times after the recent meltdown, and 21 times for the Nasdaq 100 index.
During the third quarter, Bloomberg data shows that outflows from a trading link with Hong Kong, which allows foreign investors access to Chinese local stocks, totaled $13.5 billion, the biggest in a year and reversing more than half of the inflows seen between the April to June frenzy.
CXMT Corp., which made an announcement about making progress on a memory chip competing directly with Samsung and SK Hynix and triggered a global sell-off at the start of this week, is also down 27% from its post-listing high. Yushu Technology Co. has halved from its August high, soon after its IPO.
Chinese onshore IPOs have fetched $37 billion this year, the highest in three years, according to Bloomberg data, with a third of the funds raised coming from tech firms.
Analysts have also warned that this is a technical pullback and not a value play and for many high-potential tech names, value will not emerge till they fall another 30% to 50%.
(With Inputs From Agencies)