Zhitong Hong Kong Stock Analysis | Tencent Launches DS Large Model Grayscale Testing, AI+ Adds Fuel to the Fire

[Anatomy of the Market]

The current rhythm of the Hong Kong stock market is to rise for one day and then pull back the next. However, these adjustments are profit-taking that occurs after a rally, which is a healthy fluctuation. Today, the Hang Seng Index reached a high of 22,977 points, just a stone's throw away from 23,000 points. It closed slightly down by 0.02%. The trading volume exceeded 400 billion, which is quite strong.

This kind of rise is an ideal state, conducive to sufficient turnover, and it does not deviate too far from the moving averages. The external environment remains positive. According to reports from Reference News and other media on February 16, U.S. and Russian officials will hold a meeting on the Ukraine issue in Saudi Arabia on the 18th. The reports indicate that the U.S. has almost ruled out the possibility of involving Europeans in any Russia-Ukraine negotiations.

Europe is quite anxious; after all this time, Europe, which has provided the most aid to Ukraine (over 134 billion euros, compared to around 100 billion from the U.S.), has surprisingly become an outsider. French President Emmanuel Macron is seeking to convene an emergency meeting of the leaders of major European countries on the 17th.

British Prime Minister Keir Starmer stated on Sunday that he is prepared to send British troops to Ukraine as part of a post-war peacekeeping force. He is trying to convey to the U.S. that European countries should play a role in the negotiations to end the Russia-Ukraine conflict. Combined with various accusations made by Vance at the Munich conference against Europe, the contradictions between the U.S. and Europe have deepened, which is not necessarily a bad thing for China.

On Sunday local time, Kevin Hassett, Director of the White House National Economic Council, revealed in an interview that he will meet regularly with Federal Reserve Chairman Jerome Powell to discuss the U.S. economic situation and provide a channel for conveying opinions to the President. This practice has raised concerns about the independence of the Federal Reserve. Trump still wants to intervene in the Federal Reserve, and it seems Powell can only cooperate. The U.S. inflation data for January exceeded expectations, indicating that Trump needs to be cautious in the coming months regarding tariffs and immigration issues to avoid triggering a second wave of inflation. If inflation data comes down, the Federal Reserve will have to cut interest rates.

The rise of the Hong Kong stock market will inevitably attract foreign capital's attention. According to a Goldman Sachs report last Friday, the feedback from clients regarding Chinese technology is five times the usual, but more of it consists of opposing opinions. Clearly, for a large number of clients, investing in Chinese technology is still a mandate no-go. This means that many clients are inquiring, but most are questioning and have little positioning.

However, on Monday, Kinger Lau, Chief China Equity Strategist at Goldman Sachs, and his team released a new report predicting that with the emergence of DeepSeek sparking optimism about China's technological progress, the Chinese stock market is expected to rise further after its recent strong performance.

Lau and his team expect the MSCI China Index to reach 85 points within the next 12 months, up from their previous target of 75 points. This indicates a 16% upside potential from last Friday's closing price. Data shows that in just the past month, the total market capitalization of stocks both domestically and internationally in China has increased by over $1.3 trillion, while the Indian stock market has shrunk by over $720 billion.

Some institutions have tracked the flow of foreign capital and found that there is more inflow than outflow, indicating that foreign capital had been lurking more in the past, likely cashing out at high levels. A typical example is Alibaba; Apple’s choice to cooperate with Alibaba is something foreign capital must have known about long ago. However, the cashing out by foreign capital cannot change the trend, and those who remain optimistic will continue to support the market On February 14th, the three major AMCs, China Cinda, Dongfang Asset, and Great Wall Asset, successively announced that their controlling shareholder, the Ministry of Finance, intends to transfer its shares to Central Huijin through a non-compensatory transfer. This means that the state has taken another key step in debt reduction. The debt reduction leader, China Cinda (01359), rose over 4%. Other companies controlled by Huijin, such as China Galaxy (06881), Shenwan Hongyuan (06806), and CICC (03908), all saw increases of around 3%.

Today's seminar attracted attention. According to a report by CCTV News, the private entrepreneurs attending the seminar included: Zeng Yuqun, Chairman of CATL; Jack Ma, Founder of Alibaba; Leng Youbin, Chairman of Feihe Dairy; Nan Cunhui, Chairman of Chint Group; Wang Xingxing, Founder of Yushu Technology; Liu Yonghao, Chairman of New Hope; Ren Zhengfei, Founder of Huawei; Wang Chuanfu, Chairman of BYD; Yu Renrong, Chairman of Will Semiconductor; Lei Jun, Chairman of Xiaomi; Qi Xiangdong, Chairman of Qihoo 360; and Ma Huateng, Chairman and CEO of Tencent, among others, all of whom are top enterprises in China. In the Hong Kong stock market, apart from Tencent (00700) and Xiaomi (01810), which continued to rise today, others experienced a pullback after reaching highs. They had already risen in advance last Friday.

The reason Tencent (00700) surged today is due to the news that WeChat has launched the gray-scale testing of the DeepSeek-R1 large model. This move by Tencent is considered a game-changer. The introduction of AI into WeChat means that the search battle will be reignited, spreading across the entire tech industry. The dominance of traditional search engine giants like Google is bound to be shaken, and the future of search will no longer be represented by Google or 360, but will evolve into a completely new form.

WeChat has a vast database of personal life and services, and its search function serves as the core connector of the entire WeChat ecosystem. With the deep integration of AI search capabilities, it is expected to accurately identify user intent and access various services and functions within the WeChat ecosystem, such as mini-programs, public accounts, and WeChat stores, becoming a super AI agent. Tencent's valuation will be directly enhanced, for example, by the growth potential in cloud computing brought about by massive requests, as well as the possibility of Tencent creating the next super traffic entry point. Once traffic is captured, the remaining challenge is how to monetize it, and the value-added space brought by this massive dividend is vast.

Additionally, according to Sensor Tower's data report, in January this year, taking advantage of the festive atmosphere during the Spring Festival, the revenues of major mobile game manufacturers in China saw significant growth, with domestic mobile games almost "dominating" the global mobile game revenue rankings. Tencent (00700) made a substantial profit, with its four popular mobile games occupying the top five spots in the global mobile game revenue growth rankings. The monthly revenue of "Honor of Kings" nearly doubled compared to the previous month, once again becoming the highest-grossing mobile game globally. Tencent rose nearly 4% today, and it is not an exaggeration to say that there is still considerable room for development ahead.

The integration of DeepSeek-R1 into Tencent further stimulates the vigorous development of its cloud business, as requests for cloud access will sharply increase. Related stocks, such as Maimai Technology (01860), surged nearly 22%, and directly cooperating stocks like Weimob Group (02013) rose over 11%. In fact, several major operators also benefited significantly, such as China Unicom (00762) and China Telecom (00728) in the private cloud sector In terms of computing power, it is expected that these incoming giants will have to deal with massive search data, which will also increase capital expenditure. It is said that the banned models of GPU inventory are now sold out.

The continuously mentioned IDC leader New H3C Group (01686) surged over 14% again. Tencent and Alibaba's IDC supplier GDS Holdings Limited (09698) rose nearly 5%; from the application side, 2B applications include Kingdee International (00268) and Chinasoft International (00354); for 2C applications, Kingsoft (03888); and in the cloud infrastructure direction, Kingsoft Cloud (03896) are all benefiting varieties, although the short-term increase is relatively large.

On the hardware side, there is a small article today stating that Huahong Semiconductor (01347) will quickly integrate resources after acquiring the Chengdu GlobalFoundries plant, utilizing the existing facilities and infrastructure of the plant to rapidly increase production capacity. Its 12-inch wafer factory will make up for the capacity of SMIC, and today it surged over 17%. At the same time, the demand for laminated boards has also increased significantly, with the leading company Kingboard Laminates (01888) supplying first-line PCB manufacturers in China, rising over 6% today.

The AI+ direction continues to ferment, with Meitu Inc. (01357) and Yimaitong (02192) both rising over 13%; innovative drugs are experiencing a new revaluation under the empowerment of AI. According to Yao Medicine Cube, as of November 18, 2024, the direct financing amount for domestic innovative drug companies is approximately USD 3.977 billion (excluding IPO and post-IPO financing, approximately USD 2.563 billion), while the upfront payment/acquisition amount for innovative drug BD and M&A (excluding milestone income) has reached USD 6.273 billion, surpassing direct financing to become the main source of funding, with a potential total amount reaching USD 43.204 billion.

In addition to LaiKai Pharmaceuticals (02105), Kintor Pharmaceutical (02171), and WuXi AppTec (02268), BeiGene (06160) will firmly hold the first position in innovative drug business revenue, with Zebutini expected to reach a market of USD 3 billion. Innovent Biologics (01801) is projected to have product revenue exceeding RMB 8.2 billion in 2024, a year-on-year increase of over 40%, with product revenue of RMB 2.2 billion in Q4 2024. The year 2025 is expected to be a year of commercialization, mainly unlocking high-potential chronic disease market space, becoming the company's second growth pole.

According to the International Energy Agency (IEA) report "Electricity Mid-Year Update," global electricity demand is growing at the fastest rate in nearly 20 years, with a growth of 4% in 2024 and a growth rate still reaching around 4% in 2025. China's electricity demand growth rate is expected to exceed 6% this year. Coal prices are also declining; as of February 17, the "CCTD Bohai Rim thermal coal spot reference price" for 5500K specifications fell to RMB 746 per ton, a daily decrease of RMB 4 per ton, reaching a new low since May 2021. The end of AI is electricity, and growth is a major trend. With the weakening of coal prices, electricity stocks have good opportunities, with major varieties including China General Nuclear Power (01816) and Huadian International (01071).

【Sector Focus】

On February 17, the Ministry of Industry and Information Technology and eight other departments issued the "Action Plan for High-Quality Development of New Energy Storage Manufacturing Industry," strengthening capacity monitoring and early warning for lithium batteries, and preventing blind investment and disorderly development risks. It organizes research on the development strategy of the new energy storage manufacturing industry, guiding enterprises to grasp the development rhythm, reasonably formulate industrial development goals based on the regional industrial foundation, market demand, and other conditions, and orderly deploy industrial scale Guide energy storage battery and key material companies to gather in regions rich in renewable energy, abundant mineral resources, convenient transportation conditions, complete infrastructure, and diverse application scenarios. Support the Yangtze River Delta, Beijing-Tianjin-Hebei, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu-Chongqing region, Hohhot-Baotou-Ordos region, and the cross-strait integrated development demonstration zone to focus on the new energy storage field, cultivate and develop advanced manufacturing industry clusters, and accelerate the construction of an industrial development pattern led by strategy, driven by innovation, and empowered by specialization.

Eight departments jointly issued a document to monitor lithium battery production capacity, which is expected to have a significant impact on the supply side, especially the restriction of backward capacity, which is beneficial for leading enterprises. Major stocks in Hong Kong: Ganfeng Lithium (01772), Tianqi Lithium (09696).

【Stock Picking】

Kingboard Laminates (01888): PCB prosperity rises, overseas business demand grows

In the first half of 2024, Kingboard Laminates achieved revenue of 7.891 billion yuan, a year-on-year increase of 6.44%, and a net profit of 664 million yuan, a year-on-year increase of 72.36%.

Commentary: Kingboard Group established its first copper-clad laminate factory in Shenzhen in 1988 and began producing paper-based copper-clad laminates in 1989. Since then, the product line has gradually expanded to epoxy glass fiber copper-clad laminates and fire-resistant paper copper-clad laminates. In 2006, Kingboard Group underwent a business restructuring, and Kingboard Laminates was successfully listed on the main board of the Stock Exchange after its independent spin-off. Kingboard Laminates has now become a leading enterprise in the copper-clad laminate industry, with a market share of over 15% in 2022, ranking first in the world according to Prismark Partners LLC.

As a leading enterprise in the copper-clad laminate industry, Kingboard Laminates continues to expand its production line investments both domestically and internationally. In 2022, the capital investment in copper-clad laminates reached HKD 2.417 billion. The company expects to increase copper-clad laminate production capacity by 400,000 sheets per month in Thailand in the second half of 2024, in line with the growing demand from overseas customers, including the overseas business of Kingboard Group Limited's printed circuit board companies. As of 2024, the company operates over 20 factories in East and South China.

The PCB industry is experiencing multifaceted demand growth in 2024, driven by the surge in communication and server volumes led by AI, the recovery of consumer electronics, and the increase in penetration rates of new energy vehicles, all injecting strong momentum into the industry's development. Driven by PCB, copper-clad laminate companies are also ushering in good development opportunities. Although Kingboard Laminates mainly focuses on the mid-to-low end, it stands to benefit more deeply under the backdrop of price increases, and is expected to drive the company's revenue and profit back to a growth track in 2024.

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