The recent emergence of DeepSeek-R1, alongside other competitive and cost-effective AI models developed in China, has transformed the narrative around technology in the country. This shift has not only fueled investor optimism regarding AI-driven economic growth but also boosted key indices such as the Hang Seng Tech Index and MSCI China by 27% and 19%, respectively, over the past month. In comparison, since the launch of ChatGPT in November 2022, U.S. stocks have surged by 50%, adding $13 trillion in market value.

This report delves into how AI is reshaping corporate profitability, stock valuations, and portfolio liquidity in China. We forecast that over the next decade, widespread adoption of AI could enhance overall earnings for Chinese equities by 2.5% annually . Furthermore, improved growth prospects and increased investor confidence are expected to boost the fair value of Chinese stocks by 15-20%, potentially attracting over $200 billion in portfolio inflows.

To capitalize on these opportunities, we introduce the Goldman Sachs Select China AI Portfolio, which includes 30 highly rated stocks across six thematic cohorts: Semiconductors, Power & Infrastructure, Data & Cloud, Software & Applications, Revenue Growth Companies, and Productivity Enhancement Companies.

Market Impact of AI on Chinese Equities

AI’s influence extends beyond technological advancements; it directly impacts enterprise profitability and valuation multiples. According to our analysis, AI-related sectors like semiconductors and infrastructure have already outperformed broader markets, signaling significant potential for late-cycle beneficiaries .

• Data & Cloud: Preferred theme due to accelerated monetization of AI applications.

• Software & Applications: Strong tailwinds from growing demand for AI-powered solutions.

Benchmark Analysis

Among major indices, the Hang Seng Tech Index (HSTECH) and STAR50 exhibit the highest exposure to AI-related themes. Specifically:

• HSTECH boasts a 66% exposure to tech/AI stocks.

• STAR50 shows robust participation in Data & Cloud segments.

For investors seeking targeted exposure, tradable portfolios tailored to APAC markets provide an efficient way to express bullish or bearish views on specific sub-sectors.

Investment Framework

We classify all listed companies into two broad categories: AI Technology Stocks and on-Tech Stocks, further subdividing them into six thematic groups:

Opportunities Across the AI Ecosystem

Offshore vs. Onshore Exposure

Offshore equities demonstrate higher sensitivity to AI trends compared to A-shares, explaining their superior performance in recent months. For instance, offshore giants like Alibaba and Tencent have benefited disproportionately from global recognition of their AI capabilities.

Sector Preferences

Given the current phase of the AI cycle, we favor Data & Cloud and Software & Applications due to their ability to monetize AI innovations effectively. These sectors align well with slowing capital expenditure cycles while maintaining strong application creation and commercialization momentum.

Risks and Mitigation Strategies

While AI presents immense opportunities, challenges remain:

• Macroeconomic Uncertainty: Strong policy support will be critical to sustaining market gains.

• Regulatory Scrutiny: Increased oversight in sensitive areas like data privacy may impact business operations.

Investors should adopt diversified strategies to mitigate risks, leveraging both early-stage innovators and established players within the ecosystem.

Conclusion

In conclusion, the rise of DeepSeek and similar AI models marks a pivotal moment for China's tech sector. With estimated annual earnings growth of 2.5% driven by AI and a potential increase in stock values by 15-20%, now is an opportune time for investors to position themselves strategically. The Goldman Sachs Select China AI Portfolio offers a balanced approach to navigating this dynamic landscape.