(May 14): Short sellers eying China’s hottest AI firms have found the going hard with so little of their shares publicly traded. That scarcity premium may come to an end in July as stock lockups expire.
Shares of MiniMax Group Inc and Knowledge Atlas Technology Joint Stock Co, two of China’s leading AI model developers, have surged around 400% and 860% since their January debuts, respectively. While optimism about their cost-driven competitiveness has underpinned the rally, the small pool of shares in free float has made it tough for short sellers to borrow the securities.
Only 5% of MiniMax’s total stock is freely tradable, with 65% jointly held by cornerstone investors in its initial public offering and employees unavailable for trading until July 8, according to an analysis by HSBC Holdings Plc. The lockup period, which is typically six months for such investors, will end in January 2027 for company executives.
For Knowledge Atlas, better known as Zhipu, its free float is 4%, with the lockup for cornerstone investors’ 6% stake expiring on July 7 and another 40% owned by employees and others to be released from next January, HSBC estimates.
The upcoming expiry of the lockup periods will likely put pressure on the stocks and start making it easier for investors to express bearish views, testing the durability of the firms’ dizzying stock rallies and stretched valuations. It’s also coming at a time when China’s loss-making AI model developers are starting to face questions about increased competition, the risk of a price war and their ability to monetise technology.
See also: China’s multiple economies make factory dominance hard to crack
“Valuation expectations for a handful of language model players are running ahead of fundamentals,” said Bush Chu, an investment manager at Aberdeen Investments. “It’s a common thing that happens to some IPO stocks, where a large portion of shares are still locked up, limiting short-selling activities and delaying the reflection of some bearish views.”
Shares of MiniMax and Zhipu surged again on Wednesday, on bets that Jensen Huang joining President Donald Trump’s trip to Beijing may help widen access to Nvidia Corp’s advanced chips. The two stocks are now trading at a price-to-sales ratio of slightly over 600 times and 410 times, respectively, compared with just 1.2 times for the Hang Seng Tech Index.
See also: China’s economy is entering another quarter of K-shaped growth
Fuelling the gains has been investor enthusiasm over Chinese AI developers’ cost advantages including cheaper electricity, as well as strong state support.
However, the two startups are unprofitable and analysts’ consensus is for them to stay in the red for at least this and next year, data compiled by Bloomberg show.
As bigger players such as Xiaomi Corp and Tencent Holdings Ltd are also joining the race, concerns are rising about intensifying competition and the threat of a price war. Also adding pressure are plans by fellow AI startups StepFun, Moonshot AI and Baichuan to seek stock listings.
The competitors’ IPOs will “reduce the scarcity premium” for companies like MiniMax, HSBC analysts including Ritchie Sun wrote in their analysis.
Despite such caution, the shortage of freely floated shares has made it difficult to bet against the two stocks. The annualised costs to short Minimax and Zhipu are around 39% and 27% of their share values, respectively, versus just 0.25% for regular liquid stocks, according to data provider S3 Partners.
Borrowing costs at such levels are “extremely expensive,” according to Tareck Horchani, head of sales trading prime brokerage at Maybank Securities. “This is a very significant dislocation.”
Total short positions represent less than 4% of the total outstanding shares at Zhipu and MiniMax, respectively, based on data from S&P Global.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Meanwhile, there’s a lack of alternatives in the derivatives market, including options or futures tied to the two firms.
Since late April, global banks including JPMorgan Chase & Co and Morgan Stanley have issued at least 26 call warrants for each of the two stocks. These instruments give investors the right, but not obligation, to buy the shares at a fixed strike price within a certain period or at expiry. Yet there has been a dearth of put warrants that enable investors to benefit from falling stock prices.
“You need to wait longer for the market to really price those stocks from both angles and then you can see the prices reach closer to an equilibrium,” said Aberdeen’s Chu.
Uploaded by Evelyn Chan
