(March 5): The ongoing selloff in China’s megacap technology stocks shows little sign of easing, as investors fret over spiralling spending amid heated competition.
The rally sparked by DeepSeek’s artificial intelligence breakthrough early last year has given way to some of the same concerns rattling US hyperscalers: soaring memory-chip costs, potential business disruption from AI and now the broader market malaise brought on by the Iran war.
The Hang Seng Tech Index has plunged 28% from an October high, shedding nearly US$600 billion ($765.95 billion) in market value. Tencent Holdings Ltd and Alibaba Group Holding Ltd have been worst hit by a selloff that seems poised to continue as rival ByteDance Ltd and others ramp up capital outlays.
“Investors are taking some money off the table” given tech’s recent outperformance and AI-related worries, said Lorraine Tan, director of equity research at Morningstar Asia Ltd. “AI spending in China remains reasonable, but the market is worried about intensive competition that leads to waste and low returns.”
ByteDance, Alibaba, Tencent and Baidu Inc shelled out some US$1.1 billion in subsidies aimed at luring users over the Lunar New Year holidays, according to Morgan Stanley. TikTok owner ByteDance has been especially aggressive as it seeks to protect share for its market-leading chatbot Doubao, and is expected to remain so.
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“Given the ad revenue scale of ByteDance, they should have ample resources to invest in AI,” said Chelsey Tam, an analyst at Morningstar Investment Management Asia Ltd. The company could also steal talent away from its peers, she added.
The profit impact is palpable. Goldman Sachs Group Inc slashed its price target for Alibaba shares last week, saying the company is likely to spend more than the broker originally expected through 2028 as it fights for leadership in AI.
With capex pressuring margins for China’s tech majors, investors have been chasing clearer returns elsewhere. Shares of chipmakers in Taiwan and South Korea are seen as resilient to the worries plaguing software and internet firms, and may resume their uptrend once the Iran war-driven selloff stabilises.
See also: Chinese markets weather Iran war turmoil better than Asian peers
A crop of China upstarts has been less sensitive to global market volatility. AI intelligence model developers MiniMax Group Inc and Knowledge Atlas Technology JSC Ltd, also known as Zhipu, have surged more than 280% each since their January market debuts.
There’s been “a pronounced ‘see-saw’ crowding-out effect between traditional internet giants and emerging AI players/high-growth hardware sectors”, said Bo Ning, an analyst at China Merchants Securities (HK). “Market sentiment remains cautious, awaiting clearer AI strategies from companies like Tencent and Alibaba,” he added.
Upcoming earnings will be the next key test for investor sentiment. Alibaba is expected to report a 45% decline in net income for the three months ended December, while Tencent is seen posting its slowest quarterly profit growth since 2023. JD.com Inc and Bilibili Inc report later Thursday.
Efforts by Chinese authorities to support the nation’s tech industry will also be closely watched. The sector got a lift Thursday as policymakers vowed to accelerate AI application of AI, with MiniMax climbing as much as 13% in Hong Kong and chip designer Moore Threads Technology Co adding 4.8% in Shanghai.
Valuations have dropped, with the Hang Seng Tech trading at less than 17 times forward estimated earnings compared with its five-year average of almost 22 times. China Merchants Securities’ Ning recommends buying bigger tech stocks that are oversold, on their chances for a rebound.
Others are taking more of a wait-and-see approach.
“Right now it’s really hard to call who is the winner,” said Song Zhe, an investment specialist for emerging-market equities at BNP Paribas Asset Management, a firm that’s underweight China’s internet sector. “If they stop the subsidies, whether customers would stick with their models — that’s a big question mark.”
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