"Animal spirits" are coming back, can Chinese concept stocks be revalued?

Hello everyone!

I am Dolphin Research. Since the beginning of the year, Dolphin Research has called for a cognitive reassessment of Chinese concept assets in the Strategy Weekly, and with Alibaba's massive capital expenditure, the reassessment of Chinese assets continues:

a. AI applications on the software side: Before and after the private enterprise symposium, companies including Tencent have all integrated Deep Seek;

b. AI on the cloud side: Alibaba's capital expenditure in the next three years is set to equal the total of the past ten years (how much will it feed the upstream supply chain of cloud services?);

c. AI on the endpoint side: Major smartphone manufacturers are getting involved with Deep Seek, Xiaomi's AI glasses, and Deep Seek integration with Xiaomi's Xiao Ai;

Hong Kong stocks have seen traditional real estate and financial industry valuations fully squeezed, while the technology and healthcare content is relatively high, making this round of reassessment particularly strong compared to other markets.

However, a key point here is that from the downstream perspective, the speed of AI application is very fast, but apart from Alibaba's commitment to upstream capital investment, it will still take time for AI to translate into performance. In the meantime, it is merely pulling valuations; making money by relying on valuation pull compared to performance is indeed easier, but to what extent is it considered reasonable?

1. Starting with Alibaba: Has the "animal spirit" of Chinese assets finally returned?

Regarding Alibaba's recent performance, rather than focusing on how much it exceeded expectations or how much valuation reassessment it brought to Alibaba, it is more about whether, as a landmark company since this cycle began in 2021, moving from fines, stalling, asset sales, and living in a shell to spending 380 billion, it will rekindle the animal spirit of Chinese capital and funds. Why do I say this? a. The Animal Spirit of Private Entrepreneurs

In the past few years of antitrust actions, most internet companies have been strategically retracting on the front lines while honing their internal capabilities in the background, also known as cost reduction and efficiency enhancement. This is reflected in companies reducing capital expenditures while implementing rolling layoffs.

Large platforms that connect with user terminal demands have begun to adopt a more introspective survival business strategy. This corresponds to the following results:

a. There are fewer orders from upstream suppliers;

b. The massive net layoffs downstream result in a negative cycle of consumer purchasing power;

c. In this process, internet platforms have squeezed out some benefits. However, without growth, the internet can only follow a dividend repurchase value stock logic of around 10-15 times PE.

In this round, Alibaba took the opportunity of its financial report to boldly announce: In the next three years, the total capital expenditure on Alibaba Cloud will reach 380 billion yuan, which is the total of the past ten years.

Is this Alibaba, as the leader in China's public cloud market, declaring to the market that after three to five years of contraction, Chinese internet companies will re-enter a new era of "capital investment"?

But China does not only have Alibaba in the cloud space; there are also Tencent Cloud, Huawei Cloud, and the cloud businesses of the three major telecom operators. If Alibaba sees such a large market opportunity and is fully committed to building China's AI cloud infrastructure, will its peers also have similar increases in cloud capital expenditure plans?

Especially for quantitative funds like Huanfang and companies like Alibaba that have faced antitrust actions, can these not-so-innocent companies bloom with innovation and take the lead in investment? Will the enterprising spirit and animal spirit of China's tech private enterprises be reactivated?

It is difficult to quantify this sentiment in models. However, Dolphin Research will make a simple deduction here:

Referring to the logic of the acceleration of AI infrastructure by major US application giants, Dolphin Research estimates that after Alibaba takes on the role of AI Narrative Flagbearer in China, more companies will announce capital expenditure plans during the upcoming Chinese asset earnings season, further elevating the sentiment. After the Two Sessions, Tencent's financial report (March 19) will be an important observation point.

b. The "Animal Spirit" of Market Funds

In fact, regarding this performance itself, there has not been much improvement in the competition for core assets, and a pessimistic interpretation is understandable. Because:

a. Although Taotian's customer management revenue has grown well, reaching 9%, due to high marketing expenses, it essentially means that the revenue obtained from merchants is returned to users, and the competition remains formidable; only the internal cycle has improved due to strengthened monetization rates; b. In terms of Alibaba Cloud's business, the combined internal and external revenue is 13%, but if we exclude the cloud usage from other internal Alibaba businesses and only consider the cloud revenue contributed by external customers, the growth rate has dropped to 11%, indicating that the recovery is not faster than Alibaba's internal cloud demand.

For these two core assets, the actual unexpected value is not very high.

What truly excites the market is that Alibaba mentioned that since the Spring Festival, 60-70% of new demand has concentrated on inference (which means it has already landed in actual scenarios and applications). Alibaba has seen a surge in demand and plans to invest heavily, with 380 billion yuan allocated for building AI infrastructure, which to some extent shifts its capital market narrative from value logic to future growth logic.

The funds further repairing Alibaba's valuation is, to some extent, a restoration of the market's "animal spirits" when investing in Chinese assets, as investors begin to believe in the growth stories that companies tell.

The short-term core of the ongoing market, according to Dolphin Research, is that the "investment cycle" of private enterprises will roll over or further spill into other industries.

II. Revaluation of Chinese Concept Stocks: Are External Conditions Permissible?

Similarly, in the first strategy weekly report of the year 策略周报, Dolphin Research mentioned that the implied marginal performance evolution of US giants during the Spring Festival has worsened, and funds doing global allocation will "rebalance the risk-return ratio of different asset classes."

Currently, the US stock market is still digesting the impact of Trump's reciprocal tariffs and the tax season for retail investors leading to a decline in retail stocks.

The US dollar index has been affected by the Federal Reserve's hints at further slowing the pace of balance sheet contraction (according to the current pace of balance sheet reduction, bank reserves may quickly decrease after the debt ceiling issue is resolved, and there may even be a possibility of liquidity shortages), coupled with weak retail data and a decline in the consumer confidence index, resulting in a continuous drop in the US dollar and US Treasury yields.

However, under the still uncertain impact of Trump's tariffs, the Federal Reserve's guidance for interest rate cuts within the year remains at 25 basis points.

Overall, the external environment continues to be favorable for asset revaluation.

However, on a micro level, it is important to note that this week, there is a brief pause in the earnings reports of Chinese concept stocks, while two major companies in the US stock market's AI narrative: a) NVIDIA and Salesforce will release their earnings simultaneously.

NVIDIA's guidance represents how much computing power can be produced in the second half of the year, and it will certainly explain how Deep Seek benefits NVIDIA, revising the current narrative path of Deep Seek regarding computing power. However, Dolphin Research would like to remind that the implementation of Deep Seek will indeed further release the demand for computing power from the application side.

But compared to NVIDIA's previously absolute dominance in training computing power, the lower-cost and lower-threshold inference computing power (which at least has some substitutes in the industry), even if Deep Seek drives a global explosion in computing power demand, it may lead to a slight decline in NVIDIA's monopoly position in computing power in the short to medium term logic.

It still serves as a guiding light for the entire AI sector. As for Salesforce, due to positive customer feedback surrounding the new AI customer service tool, this earnings report will verify the speed and quality of the AI agent narrative's implementation.

If among these two companies, NVIDIA's guidance significantly exceeds expectations, especially if Salesforce's AI Agent penetration rate progresses very quickly, then US SaaS software stocks will continue to have opportunities this year.

In the meantime, if funds refocus on US AI, then US priority may lead to a short-term profit-taking adjustment in Chinese concept stocks, but afterwards, if Tencent announces an increase in capital expenditure, then the story of revaluation in Chinese AI technology still has hope to continue.

At the same time, attention should be paid to this year's Two Sessions; as long as expectations are met: for example, GDP target of 5%? CPI target of 2% or 3%? Will the fiscal deficit reach 4%? What about the intensity of government bond issuance? Directions for fiscal stimulus? And so on.

3. Portfolio Adjustment and Returns

Last week, Alpha Dolphin made no adjustments to the portfolio. The Alpha Dolphin portfolio achieved a return of 1.6% last week, outperforming the CSI 300 (+1%) and the S&P 500 (-1.7%), but underperforming MSCI China (+3.9%) and Hang Seng Tech (+6%). This is mainly due to some AI assets in the high-weight assets, such as TSMC and Amazon; as well as consumer stocks like Nongfu Spring.

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 85%, with an excess return of 81% compared to MSCI China. From the perspective of net asset value, Dolphin Research's initial virtual asset of 100 million USD has exceeded 187 million USD as of last weekend.

4. Contribution of Individual Stocks to Profit and Loss

Last week, the revaluation of Chinese technology stocks triggered by DeepSeek continued; the application layer of technology is moving from the internet to the cloud industry chain and edge products; meanwhile, U.S. stocks experienced a pullback due to anxiety over Trump policies and the retail capital gains tax season.

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

5. Asset Allocation Distribution

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

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

6. Key Events This Week:

This week, the earnings season for Chinese concept stocks takes a brief pause, while two major U.S. companies, NVIDIA and Salesforce, release their earnings. The key points summarized by Dolphin Research are as follows:

Risk Disclosure and Statement of This Article: Dolphin Research Disclaimer and General Disclosure

For recent articles in the Dolphin Research weekly report, please refer to:

“This is the most down-to-earth, Dolphin Investment Portfolio has started”