UBS: Positive on the performance of Chinese AI technology hardware stocks in the second half of the year, next year the volatility may increase.

UBS China equity strategy research director Wang Zonghao said that with strong profit momentum, high retail participation enthusiasm, and incremental funds brought in by new IPOs, he continues to be bullish on Chinese AI technology hardware stocks for the remainder of the year. He noted that some signs indicate that the uptrend cycle of Chinese AI technology is gradually approaching its peak, but it is still too early to exit the technology sector now. He is positive about the leading companies in key AI sub-industries, including optical modules, storage, GPUs, copper-clad laminates, and semiconductor equipment. Wang Zonghao pointed out that the profit momentum in the technology sector will remain strong for the rest of the year. Historically, when the expected profit growth rate is higher than 30% (currently at 80%), AI technology hardware stocks outperform the market by 10-20% annually. At the current stage of the cycle, small-cap technology companies may benefit from industry beta and demand spillover opportunities. However, 2027 will be a key year to test whether these companies (and industries) can truly fulfill the promises of AI. He mentioned that since 2021, the revenue of Chinese and global AI companies has basically doubled. However, the cash flow generation capability of global peers surpasses that of Chinese companies. In the past few years, global AI companies have outperformed Chinese AI companies by 130%, but in 2026, Chinese companies have outperformed by 17%. Although the P/E ratio of Chinese AI technology hardware companies has been lower than their global peers in some years, this is no longer the case. The cash flow generation capability of Chinese and global AI technology companies has improved. On the other hand, the valuation of domestic power equipment companies and ultra-large-scale cloud vendors seems more attractive compared to their international peers. He believes that strong revenue and profit growth in the remainder of the year will continue to support AI technology companies. However, as capacity expansion and slower growth in the next year may lead to increased volatility, he expects industry leaders who further penetrate the global supply chain to perform better.