The DeepSeek-R1 large language model (LLM) was China’s response to Open AI’s Chat GPT and represents a shift in the AI industry by combining open-source accessibility, affordability and high performance.
Edith Qian of CGS International (CGSI) estimates that 90% of the constituents of the Hang Seng Tech Index have incorporated AI into their business operations, while the exposure of index constituents to AI technology for the broader Hang Seng Index is around 45%.
By adopting or integrating DeepSeek technology, companies can enhance their products and services and drive earnings. “In the medium term, we expect DeepSeek’s breakthrough as a re-rating catalyst for the Hong Kong market,” states Qian in her Feb 7 report.
Year to date, both the Hang Seng Index and MSCI China have both seen positive returns of 4.1% and 4.4% respectively as of Feb 6. The Hang Seng Tech Index, meanwhile, surged 13.2% YTD, coming within 3.2% of its recent peak last October.
With the catalyst from AI, Qian believes the recent rally in the Hong Kong market still has legs as she raises the baseline scenario for CGS International’s Hang Seng index target by 14% to 26,300 points at the end of the year.
Her bullish case is further bolstered by how valuations fetched by the Hong Kong-traded large tech counters are way below the recent peak seen last October and also at a significant discount compared to their global peers and historical median.
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As of Feb 6, the Hang Seng Index and MSCI China are trading at forward P/E of 9.7 times and 10.7 times respectively, 30% and 23% lower than the 13.8 times ratio of the MSCI emerging markets ex-China index.
The Hang Seng Tech index, meanwhile, is trading at a forward P/E of 18.5 times, which is lower than that of Nasdaq Composite index’s 30.2 times and NYSE Fang+ index’s 35.2 times. It is also worth to note that the forward P/E ratio of the Hang Seng Tech index is 66% down from its all-time peak in February 2021 and 35% below its five-year historical median of 28.2%.
The release of DeepSeek helps Qian make a more bullish case for Hong Kong. “In the long term, we believe companies engaged in chip design and manufacturing, AI development and infrastructure, cloud computing, software services, edge devices and autonomous driving are poised to benefit the most from these latest developments.”
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High-conviction picks identified by Qian include internet giant Tencent Holdings, which has been given a target price of HK$537 ($93.37); electric vehicle makers XPeng and BYD, with target prices of HK$76.8 and HK$398 respectively; Xiaomi, which has a growing presence in EVs too on top of its consumer electronics; and also Sunny Optical Technology Group, producer of optical lenses used in smartphones.
CGSI’s target prices for the last two counters are HK$45 and HK$91.8 respectively.
