As direct player stocks mature, second-tier players are coming to the fore.
[SINGAPORE] While investor attention has largely been focused on the U.S.’s artificial intelligence-powered rally, China is experiencing its own technology boom.
The Shanghai Stock Exchange’s (SSE) Star 50 Index, which tracks the 50 most liquid high-tech companies listed on the stock exchange’s Science, Technology and Innovation Board (STAR), has risen 42.2% year-to-date, reaching an all-time high on Friday (June 19). In contrast, the SSE Composite Index, which tracks the performance of all stocks listed on the SSE, has risen 3.1% year-to-date.
Meanwhile, the CSI 300 index, which consists of the 300 largest and most liquid A-shares listed on the Shanghai and Shenzhen stock exchanges, rose 6.7% over the same period.
The Hang Seng Index, which tracks the largest and most liquid companies on the Hong Kong Stock Exchange, has fallen 6.7% since the beginning of the year.
According to estimates by the China Academy of Information and Communication Technology and Frost & Sullivan, China’s AI market will grow from US$23 billion in 2024 to US$31 billion in 2025.
It is projected to reach USD 142 billion by 2030, implying a six-year compound annual growth rate of 35.5%.
Hardware takes control
Hardware-related stocks are leading the rally in Chinese tech stocks.
Cambricon Technologies, a domestic chip design company listed on SSE Star, soared more than 150% from January 2025 to April this year. Hong Kong-listed Huahong Semiconductor soared more than 400% during the same period.
Both stocks outperformed the Morningstar China TME Index, which tracks the performance of China’s large- and mid-cap stocks, rising about 25% during the period.
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This victory was driven by strong demand for computing power, graphics processing units, AI accelerators, and advanced semiconductor infrastructure.
But with valuations for semiconductor and hardware stocks rising ahead of earnings growth, some Chinese institutional investors are looking beyond the sector’s clear winners.
Second-tier beneficiaries that are attracting investor attention span cloud services, power infrastructure, internet platforms, and data center supply chains. Fund managers believe these businesses are well placed to capture value as the use of AI spreads across the economy.
“Portfolio managers are becoming more selective and valuation-conscious about the names of their AI hardware, and we’re noticing that some companies’ valuations are moving ahead of revenue realization,” said Claire Liang, principal and research manager at Morningstar.
As a result, several China-focused funds have reduced their exposure to the sector.
For example, Schroders’ ISF China Opportunities Fund maintained an underweight position of about 4% in the information technology sector in February, citing high valuations among AI hardware companies.
Look beyond chip makers
Against this backdrop, institutional investors are becoming indirect beneficiaries of AI adoption.
Lorraine Tan, director of equity research at Morningstar, said companies in the broader AI ecosystem, including equipment suppliers and infrastructure providers, are expected to benefit from improved order book visibility in the coming years.
For example, JPMorgan Asset Management’s China fund stands to benefit from increased power demand from AI workloads.
The company’s shares include power infrastructure companies such as Sieyuan Electric, Anhui Yingliu, and Huaming Power Equipment. Asset managers expect these businesses to grow faster than overall AI spending over the next two years.
The fund also maintains selective exposure to application layer companies. These include e-commerce giant Alibaba, as well as content platforms Kuaishou and Meitu, which could benefit from new monetization opportunities.
Similarly, Mr. Schroders has supported internet platform companies with high-quality proprietary data sets.
We believe the opportunity to monetize AI through cloud services and personalized recommendations offers a better risk-reward profile than investing in hardware manufacturers.
Still bullish on hardware
Despite the rotation, not all managers are abandoning hardware.
Liang said some still prefer hardware-related segments, which offer better profit prospects.
These include advanced printed circuit board (PCB) manufacturers, optical companies, and power infrastructure providers. The growth in AI workloads is increasing technology requirements and increasing value per unit across these segments.
JPMorgan Asset Management continues to favor companies it calls “AI enablers,” or infrastructure companies that can benefit regardless of which AI model or platform ends up winning.
The company’s holdings include PCB-related companies such as manufacturers Zhen Ding Technology and Suzhou Dongshan Precision.
Asset managers believe these companies will benefit from upgrades driven by increasingly complex AI server architectures.
