Chinese Concept Stocks: How Much Longer Can They "Go Crazy"?

Hello everyone!

This is Dolphin Research. Last week, I emphasized in Strategy Weekly that Chinese concept assets deserve a reassessment. Based on last week's asset performance, the valuation repair of Hong Kong stocks led by technology has been significant: the Hang Seng Index and the Hang Seng China Enterprises Index PE valuation have repaired to around 10X, reaching about the 60th percentile of the past five years.

Next, an important question is, how much room is there for further reassessment? Before answering this question, let's first look at how the past external economic data has provided a repair environment.

1. Is the U.S. economy overheating again?

1) Is inflation going to rebound?

Since the beginning of the year, although some of the economic data released by the U.S. may be misleading, the overall performance is not weak. Last week's CPI even showed signs of surging.

Whether it's the overall inflation increase of 0.5% or the core inflation month-on-month increase of 0.45%, the month-on-month trends over the past few months have been quite exaggerated. At first glance, it looks very bad.

Breaking it down, the main categories driving up core inflation are:

a. In core goods, used car prices increased by 2.2% month-on-month, pushing the month-on-month increase in goods prices to 0.3%;

b. In core services, motor vehicle insurance has significantly increased again, leading to a month-on-month increase of 1.8% in transportation services;

c. In core services, entertainment services such as audio and video services, membership/ticket/course price increases rose by over 2% month-on-month, causing entertainment services to rise from 0.3% to 1.4% in January.

The high increases in these three categories led to a month-on-month growth of 0.3% in core goods prices and a 0.4% increase in core services. Since January is the first month of the new year, seasonality is usually stronger.

Therefore, while the CPI is indeed high, there is no need for excessive concern, especially since the Federal Reserve has communicated in advance and the market has fully anticipated only one rate cut in 2025; long-term U.S. Treasury yields are also trading at a high level of 4.5%. To some extent, the market has fully priced in expectations of a resurgence in inflation.

2) Are retail sales weak?

In contrast to the overheating CPI, U.S. retail sales in January were much weaker. The seasonally adjusted month-on-month decline was 0.88% (equivalent to an annualized decline of 11%, while typically retail sales year-on-year should be between 4-5%), which is almost the worst state in the past year.

From a sub-item perspective, the retail sales, excluding catering services, are weaker, with a month-on-month decline of 1.16%. High-weight retail categories such as automobiles and auto parts, food and beverages, and non-store retail (online/fuel sales) have all seen significant declines.

The significantly rising CPI and the severely weakening retail sales represent a short-term contradiction. Combined with the microdata presented by companies during the recently concluded U.S. earnings season, most industries and companies have not shown further strengthening in their economic conditions on the margin:

Traditional manufacturing is mainly downward, while cyclical industries such as finance and the semiconductor industry, although at high levels, have not seen further improvement in their economic conditions. In the semiconductor industry, looking at the current new product cycle, from NVIDIA, AMD, and even down to downstream end-side products, the mass release of new products is basically in the second half of the year. If the inflation trend in the first half of the year does not improve and instead strengthens, these assets may need time to adjust.

One area to pay attention to is that although large service providers have announced record-high capital expenditures without marginal increases in revenue, this has suppressed their short-term stock price gains but has not brought significant benefits and boosts to upstream semiconductor hardware.

Next, the AI market in the U.S. stock market:

a) The AI market may next look at the AI implementation progress of traditional broad-scenario SaaS stocks like Salesforce;

b) The performance outlook of computing power giants NVIDIA, Broadcom, and Marvel (the latter two have recently faced some pressure due to order information from ALCHIP and MediaTek).

2. What stage is Chinese concept assets trading at now?

The Hang Seng Index has recovered to the 60% valuation percentile of the past five years, while the Hang Seng Tech Index is at the 30% valuation percentile of the past five years. The current questions are:

a. Given the weak expectations for interest rate cuts in the current external environment, which is inflationary; b. In the short term, with U.S. corporate performance trends unable to support further valuation increases in U.S. stocks, is there still an opportunity for further valuation increases in Chinese concept stocks?

From the fluctuations since 2025, the rise and fall of the stocks tracked by Dolphin Research mainly revolve around the asset revaluation stemming from DeepSeek. However, assets with strong consumption or cyclical attributes, especially with weak consumption data during the Spring Festival, such as Huazhu and Nongfu, have instead been the objects of capital outflows, including some assets with strong dividend return attributes.

The trading based on the policy expectations of the Two Sessions has not yet begun. This means that short-term cognitive revaluation based on technological breakthroughs may face profit-taking after a significant rise, but after adjustments, there may still be opportunities for Chinese assets in the future

3. Portfolio Adjustment and Returns

Last week, Alpha Dolphin made no adjustments. The Alpha Dolphin portfolio achieved a return of 3% last week, outperforming the CSI 300 by 1.2% and the S&P 500 (+1.5%) but underperforming MSCI China (7.4%) and Hang Seng Tech (7.3%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 83%, with an excess return of 82% compared to MSCI China. From the perspective of net asset value, Dolphin Research's initial virtual asset of 100 million USD has exceeded 185 million USD as of last weekend.

4. Individual Stock Profit and Loss Contribution

Last week, the revaluation of Chinese technology stocks triggered by DeepSeek continued; the application layer of technology—Internet companies continued to drive valuations; in the U.S. stock market, the fluctuations were mainly driven by earnings reports.

The specific stocks with significant price changes are analyzed by Dolphin Research as follows:

5. Asset Portfolio Distribution

The Alpha Dolphin virtual portfolio holds a total of 17 stocks and equity ETFs, with a standard allocation of 8 stocks, an overweight of 1 stock, and the rest underweight. Besides ancient coins, assets are mainly distributed in gold, U.S. Treasury bonds, and USD cash.

As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

6. Key Events This Week:

The fourth quarter earnings season for U.S. stocks is coming to an end this week. Among the companies covered by Dolphin Research, Rivian and Unity are set to release their earnings. Starting this week, we enter the earnings season for Chinese concept assets, with Alibaba, Baidu, Bilibili, and others leading the way after significant gains.

The key points summarized by Dolphin Research are as follows: