UBS: Valuations of China's AI tech hardware near historic lows, risk-reward turning more attractive

UBS released a research report stating that AI fundamental concerns have been overly amplified, valuations of China's AI tech hardware stocks have approached historic lows, and the risk-reward profile is turning attractive again. The bank noted that following the recent tech-led correction, major Chinese indices have fallen 18% year-to-date, while AI-related tech hardware stocks tracked by the bank have risen only 9% year-to-date. It believes investor attention may pick up as they rebalance portfolios for the new year at year-end. The bank also noted that earnings growth for tech hardware remains strong, with earnings forecasts for most AI tech stocks revised up 12% to 15% over the past three months, yet valuations have neared historic troughs and imply a significant slowdown in future earnings growth. Historically, when valuations reached similar levels, the relevant stocks rose an average of more than 50% over the following 12 months. The bank's crowding and financing data show that net "hot money" positioning has fallen back to early-year levels, the short-selling ratio in Hong Kong stocks is also near historic highs, and short selling in some AI tech hardware stocks has increased recently. On the overall market, MSCI China's 12-month forward price-to-earnings ratio has reached 9.5x, 1.2 standard deviations below the historical average. However, Chinese equities' relative earnings growth and momentum are weaker than other markets, RMB appreciation will continue to pressure exporters, and higher input costs may also weigh on domestic consumption. The bank therefore prefers a barbell strategy, with top picks in AI tech hardware being Semiconductor Manufacturing International Corporation (00981), NAURA Technology Group (002371.SZ) and CXMT Corporation (688825.SH), as well as top picks in bank stocks.