China’s Hardware Tech Stocks Look to Earnings to Sustain Rally

(Bloomberg) — Chinese hardware technology stocks have been on a tear. The next challenge is showing the earnings to back it up.

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A surge in AI infrastructure spending by hyperscalers, combined with Beijing’s push to foster homegrown tech champions, has sent the chip-heavy STAR 50 Index up by a record 64% this quarter. Investors pulling money out of struggling consumer and retail stocks have further amplified the moves.

While few in the market doubt China’s long-term tech story, there are concerns whether surging share prices and exuberant sentiment have gotten ahead of themselves. As earnings season kick off this week with some preliminary announcements, companies have a chance to prove the rally is justified.

“Sentiment feels like it’s near a temporary peak,” said Shi Junbo, a fund manager at Hangzhou Xiyan Asset Management. “A lot of AI hardware leaders have baked current growth into their share prices, and it’s getting hard to justify pushing them higher on fundamentals alone.”

Money is already flowing into niche corners of the AI supply chain, including materials and components. Shi said this spillover suggests many investors are no longer confident bidding up the biggest winners at current levels.

Take Zhongji Innolight Co., a maker of optical communications devices. The stocks is up 132% this quarter and trading at about 40 times forward earnings, versus 33 times for the Dow Jones US Telecommunications Equipment Index. It’s also around 20% above the average analyst price target compiled by Bloomberg.

The broader profit outlook hasn’t kept pace with share prices. Analysts have raised earnings estimates for the STAR 50 by more than 4% this quarter, according to data compiled by Bloomberg. That pales in comparison to the index’s surge, leaving it trading at 69 times forward earnings, a record high.

For now, though, most analysts are sticking with their bullish views. Goldman Sachs Group Inc. prefers Chinese mainland-listed shares over those in Hong Kong, citing stronger earnings performance by onshore indexes led by AI profits shifting toward hardware firms. Morgan Stanley also favors mainland markets because they have a bigger concentration of “hard-core” tech names.

The divergence is reflected in the market performance. While STAR 50 has rallied, Hong Kong’s Hang Seng Tech Index has fallen 5.3% this quarter as internet stocks linked to China’s sluggish consumer spending have lagged.

Some Chinese companies have already offered an early glimpse of earnings. Satellite Chemical Co., which makes chemicals used in electric vehicles and chips, said first-half profit is expected to jump by as much as 155%. Semiconductor testing firm Hangzhou Chang Chuan Technology Co. said net income will at least double. Their shares jumped after the announcements.

The sector got another boost after China’s top securities regulator pledged to ease listing standards for AI developers and other advanced technology firms. The move was seen as a strong show of support from Beijing, driving a rally in related shares last week.

“China onshore hardware tech is — and will remain — expensive versus global peers. But that alone isn’t a reason to turn bearish, as the premium stems from the fact that liquidity can’t easily leave borders,” said Zeng Wenkai, a fund manager at Shengqi Asset Management Co. in Hong Kong. In other words, a large pool of local liquidity is concentrated in the onshore market, bidding up valuations.

“In this market, the playbook is simple: buy and hold. Don’t overthink global peers comparisons or get hung up on valuations seriously,” Zeng added.

Another investor, Li Hai, a fund manager at Hainan Yuhe Fund Management, also believes the tech upcycle is far from over, even as valuations in parts of the market look stretched.

“The classic signals of a real downturn — weaker demand, tighter policy and earnings misses — simply haven’t shown up,” Li said. “The next two years will be a critical window for breakthroughs in foundational technologies and key bottlenecks, and policy support will visibly be anchored through 2029.”

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