AI Localization Correction Is a Good Opportunity to Position
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AI Localization Correction Is a Good Opportunity to Position
JPMorgan believes that China's stock market currently has ample liquidity, and although the valuation of the AI industry chain is high, risks have been partially digested. It is recommended to increase holdings in semiconductor equipment and core computing power assets during short-term adjustments.
- AI infrastructure construction drives market differentiation, with innovative enterprises significantly outperforming traditional indices.
- The fundraising scale of chip factories' listings accounts for only 2% of daily trading volume, limited market impact.
- Domestic equipment manufacturers such as AMEC and NAURA will benefit from over RMB100 billion demand driven by domestic storage capacity expansion.
- Institutional fund portfolio adjustments are manageable, and market concentration is gradually easing.
- It is recommended to use short-term volatility to focus on high-quality targets in hard technology sectors.
Report interpretation
Overview
This report points out that although the overall valuation of the Chinese market is relatively high, the hard technology sectors driven by AI localization are becoming core growth engines. JPMorgan believes current market sentiment is overly pessimistic, and some positive factors (such as chip factory listings) have been exaggerated, with actual impacts far below historical levels. Based on stable liquidity, clear industrial trends, and opportunities brought by valuation corrections, the report maintains a positive stance toward Chinese stocks and recommends investors seize the opportunity to increase holdings in core AI-related assets when short-term adjustments occur.
Core views
The report first emphasizes that since April, the performance of the Chinese market has been highly differentiated, with local innovation companies represented by the STAR50 and ChiNext indexes leading the rise, increasing by 43% and 29%, respectively, while overseas indices such as the Hang Seng Index and MSCI China lagged significantly. This differentiation clearly reflects the penetration level of the 'AI ecosystem'—the exposure to AI-related hardware and semiconductors for the STAR50 and ChiNext is about 75% and 56%, respectively, significantly higher than MSCI China (48%) and the Hang Seng Index (32%). This indicates that market funds are shifting from broad internet platforms to deeper infrastructure construction areas. Secondly, despite concerns about the potential capital diversion caused by the upcoming IPOs of Yangtze Memory Technologies (CXMT) and YMTC, JPMorgan analyzes that the combined fundraising size of approximately RMB30-40 billion accounts for about 2% of A-share average daily turnover (ADT), not only lower than the monthly average since 2013 but also historically showing that even large-scale fundraising does not necessarily lead to sustained declines if market direction and liquidity support are maintained. Therefore, the negative impact of this event on the market is overestimated. More importantly, these fundraising projects will drive rapid domestic storage capacity expansion: it is expected that within 1-2 years, Yangtze Memory Technologies' DRAM capacity will increase from 280-290 thousand wafers per month to 800 thousand wafers; YMTC's NAND capacity will also increase from 200 thousand wafers to 500 thousand wafers. This expansion cycle will directly boost demand for semiconductor equipment and packaging services, estimated to release more than RMB100 billion in incremental demand. Therefore, the report believes that upstream equipment manufacturers like AMEC and NAURA will be the biggest beneficiaries, and any short-term correction triggered by concerns about capital outflows is a 'good buying opportunity'. Additionally, the report notes that the impact of correcting the 'style drift' of domestic public funds on the market is also minimal. Through simulation calculations, even if all funds adjust according to a 5% weight limit, the total inflow into financial, industrial, and energy sectors would be approximately RMB14.7 billion, RMB10.9 billion, and RMB4.5 billion, while the outflow from materials, discretionary consumption, and healthcare sectors would be about RMB11.9 billion, RMB5.9 billion, and RMB1.6 billion. This scale is negligible compared to the A-share daily turnover of RMB2-3 trillion, thus having limited impact on the overall market, more structural rotation rather than systemic risk. Finally, regarding regulatory measures strengthening cross-border securities activities management, the report estimates its impact equivalent to 0.5-1.2 days of Hong Kong equity turnover, which may pressure certain brokers but could bring revenue growth through client transfer for banks and insurance institutions. Overall, these external factors do not change the fundamental logic and liquidity support.
Analysis framework
JPMorgan uses a multidimensional cross-validation method to build its views. First, quantitative indicators (such as market cap weighting, industry exposure, technical scores) measure market structure changes, finding that market concentration had risen but recently showed signs of relief. Second, historical data comparison assesses the actual impact of major events (such as large IPOs), avoiding emotional judgments. Third, micro-modeling methods based on real fund holdings data perform stress tests to accurately estimate the scale and impact of capital flows. Fourth, macro liquidity data (such as money supply, turnover rate) judge whether the market environment supports risk appetite. This comprehensive analytical framework makes the conclusions more persuasive rather than relying on a single indicator or emotional inference.
Methodology notes
The core contradiction in this industry lies in the matching relationship between supply-side capacity expansion and demand-side technological iteration.
The report infers significant demand for upstream semiconductor equipment by analyzing domestic storage chip expansion plans, thus building a 'supply-driven demand' logical chain.
The report implicitly includes an analysis of policy tolerance under the background of economic 'soft landing'.
Against a backdrop of weak economic demand, regulatory tightening on capital outflows remains restrained, reflecting policymakers' balance between economic growth and financial stability.
The report judges whether the market is overheated by comparing the price-to-earnings ratio (PE) and earnings growth rate (PEG) of different sectors.
Although the formula is not directly used, the judgment of 'overvaluation' is based on the assessment of the relationship between profitability and stock price gains.
The report focuses on the irreplaceability of enterprises in specific technological fields.
The recommendation for AMEC and NAURA is based on their established 'moats' in the domestic semiconductor equipment sector, namely technological barriers and supply chain positions.
The report identifies and predicts the turning point when the market shifts from 'emotion-driven' to 'fundamentally driven'.
When the market transitions from chasing concepts to focusing on actual capacity and orders, it signals a recovery in sentiment, at which point positioning should begin.
The report judges sustainability by analyzing the relationship between company capital expenditures (capex) and revenue growth.
Capital expenditure corresponding to expansion plans leads the report to conclude that related equipment manufacturers will experience strong performance support in the coming years.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- AMEC - A(688012.SS)As a leading domestic semiconductor equipment manufacturer, it directly benefits from the capacity expansion of Yangtze Memory Technologies and YMTC.
- Strengths
- Leads in the domestic market, with deep technical accumulation, and is a key participant in domestic substitution.
- Weaknesses
- Constrained by global supply chain fluctuations and faces competition from international giants.
- Comparison
- Compared to peers, it has stronger competitiveness in high-end etching equipment.
- Risks
- Geopolitical risks, delayed technological breakthroughs, industry cycle downturn
- NAURA - A(002371.SZ)Also a core supplier of domestic semiconductor equipment, it will similarly benefit from domestic storage expansion.
- Strengths
- Broad product lines and stable customer base, with technical advantages in multiple sub-sectors.
- Weaknesses
- Gross margin is greatly affected by raw material price fluctuations, and R&D investment pressure is high.
- Comparison
- Compared to AMEC, it has more distinctive features in thin film deposition equipment.
- Risks
- High order concentration, downstream customer sentiment decline
- Baidu.com (9888.HK)As a leading domestic artificial intelligence enterprise, its technological progress is an important source of market confidence.
- Strengths
- Has a deep layout in large models and autonomous driving, with strong R&D capabilities.
- Weaknesses
- Slow commercialization speed, unclear profit model, and faces fierce competition.
- Comparison
- Compared to other internet platforms, its technological investment and long-term vision are more favored by institutional investors.
- Risks
- AI monetization falls short of expectations, regulatory risks, technological route iteration
- Iluvatar CoreX - H(9903.HK)As an emerging computing power company, its development is closely related to domestic data center and computing power infrastructure demand.
- Strengths
- Focuses on high-performance computing, technologically advanced, and has the potential to become an important supplement to domestic computing power.
- Weaknesses
- Smaller company size, limited market recognition, poor liquidity.
- Comparison
- Compared to traditional chip design companies, its business model focuses more on software and system integration.
- Risks
- Fast technological updates, intensified market competition, high customer acquisition costs
Key data
- A-share Average Daily Turnover (ADT)Rmb2-3tnBenchmark for assessing the impact of major financing events
- Total Fundraising Amount of CXMT&YMTC IPOcRmb30-40bnAccounts for about 2% of A-share Average Daily Turnover
- Domestic Storage Capacity Expansion TargetsDRAM: 280-290k → 800k wafers/month; NAND: 200k → 500k wafers/monthTo be achieved within 1-3 years
- New Equipment and Packaging Demandover Rmb10obnTo be released within three years
- Estimated Net Inflow/Outflow Due to Fund Style DriftFinancials +Rmb14.7bn, Materials -Rmb11.9bnBased on 5% weight deviation assumption
Impact & implications
This report means that investors should not panic and sell due to short-term market fluctuations or regulatory news. Instead, they should seize the opportunity of market sentiment mismatch and allocate funds to hard technology sectors truly benefiting from national strategies and industrial upgrades. Particularly those enterprises with core technologies in key links and capable of deeply participating in the domestic substitution process, such as semiconductor equipment manufacturers, will enjoy certain high-growth rates in the coming years. At the same time, this also prompts investors to reassess their investment portfolios, shifting from chasing short-term hotspots to focusing on long-term structural trends.
Risks
- Domestic macroeconomic recovery is weaker than expected, affecting corporate capital spending willingness.
- Escalation of geopolitical tensions limits key technology imports and cooperation.
- Slow AI commercialization process leads to unclear profit prospects for related companies.
- Increased capital market volatility may cause investor sentiment to fluctuate, affecting sector performance.
What to watch
- Expansion progress and actual capacity ramp-up of Yangtze Memory Technologies and YMTC.
- Whether new trends emerge in the portfolio adjustment of domestic public funds.
- Guidance on capital spending and orders in quarterly reports of major tech companies.
- Dynamics of policy competition between China and the US in high-tech fields.