China is challenging the U.S. in the artificial intelligence sector (AI) by investing $150 billion into the sector by 2030 with the aim to dominate the industry. This industrial policy announcement is convincing investors to look past weak earnings and buy AI stocks.

Iflytek, a Chinese developer of speech-recognition software, is an example of how AI-related shares have dramatically increased in value over the past year. Iflytek has increased 118% this year even though it has failed to meet profit estimates. BOE Technology Group, a company developing a system to help drivers avoid traffic accidents, is another listed company that is fast becoming an actively traded AI-related stock.

China?s AI Industrial policy has no guarantee of success and HXL cautions this current AI buying frenzy. We believe the rally in AI stocks has increased too fast with some AI technologies taking years to realise a profit and there is the real possibility that some AI technologies will prove to be unprofitable.
Until now, China has not produced a world-leading semiconductor or a motor vehicle. However, it is emerging as a major global contender in AI based on four key areas- a large, tech-savvy population, a large supply of available data, infrastructure and computing power. Furthermore, privacy laws are weak in China with the government collecting information on its citizens from the day they are born while Baidu, Alibaba and Tencent know what its users are purchasing, where they are travelling and who they are talking too.

Can China dethrone Industry Heavyweights?

Microsoft, Yext, Micron, Facebook and Alphabet (Google) are all big tech companies that are expected to yield AI success given their strategies, availability of capital and previous track records. Investors in China are paying little attention to earnings and taking bets that the Chinese government AI policy will make the country a world leader and this justifies current high price-to-earnings ratios given long-term potential of the technology and heavy investment from some of China?s largest companies.

HXL advises investors to be cautious when investing in China-listed AI-related stocks as the sector is becoming increasingly crowded and it continues to face heavy competition from local giants Alibaba and Tencent, and global giants including Microsoft and Google. These companies have been developing the technology for the past few years and makes the smaller AI companies vulnerable in crowded sector.

Which Stocks?

For clients who wish to purchase AI-related stocks, HXL advises to invest in companies that have aligned itself with one of the larger companies. For example, ride-hailing company Didi Chuxing and on-demand services provider Meituan-Dianping. AI products will take some time to monetise with significant investment required and this should be a factor when deciding whether to invest in the sector as a long-term investment with sector becoming gradually crowded with increased competition.

HXL Partners

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