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Chinese e-commerce giant Alibaba is declaring a new era. “We believe the growth opportunity driven by AI services have just begun,” management said in a conference call with analysts Thursday. They’re claiming “strong demand” for training artificial intelligence models on the cloud — so much that they can’t meet all the requests due to a shortage of processing power. Cloud is the first of the six business units that Alibaba has signaled clear IPO plans for. Cloud rival Tencent is also expected to discuss AI business plans when it reports results Wednesday. Baidu , which has its AI-powered Ernie chatbot, is set to release earnings on Aug. 22. While all that training is driving demand for Nvidia’s chips, it’s less clear what the commercial returns on AI development are in the near term. Where to play it Where HSBC analysts are looking is in Chinese AI hardware stocks. “We believe we are still only in the early stages of the AI cycle,” the analysts said in a report this month. “The need to keep upgrading all this hardware is urgent, as computational power is now doubling every three and [a] half months,” said Frank He, head of A share technology hardware research and a team at HSBC Qianhai, the bank’s majority-owned joint venture in China. They have buy ratings on three mainland-China listed stocks, known as A shares. Here is the analysts’ case: Foxconn Industrial Internet — An Nvidia supplier, the company is expected to benefit from AI investments from Microsoft, Google and Amazon, among others. HSBC has a 33.10 yuan price target, for more than 50% upside from Friday’s close. Innolight — The Suzhou-based company makes optical transceivers, which facilitate high-speed transmission in cloud data centers. Its customers also include Nvidia and U.S. and Chinese cloud companies. HSBC has a 224.30 yuan price target, for upside of more than 80% from Friday’s close. Montage — The integrated circuit company is expected to see “material” increase in penetration rate of its DDR5 chip. HSBC has a 74.80 yuan price target, for nearly 40% upside from Friday’s close. Innolight is up more than 350% so far this year, while FII is up 140%. Montage is down by about 12% Whether U.S. investors can tap into those gains has come under question as the U.S. government has put several Chinese companies, mostly state-owned, onto blacklists for alleged support of China’s military. But the Biden Administration’s executive order and pending Treasury regulations indicate a narrow scope — in which investments into stocks won’t be as affected as startups. Taylor Ogan, CEO of Snow Bull Capital, moved from the U.S. with his team of three to Shenzhen, China, in January to open a research office. Based on in-person company visits — which revealed about a third had “lousy management” and not investable — he’s decided to focus on Chinese AI and green energy companies. His watchlist of about 90 Chinese AI companies has more than doubled in value this year, Ogan said, noting his firm only owns a handful. It’s a “tumultuous time,” he said, “but high risk, high reward now more than ever [is] just going to continue.” On top of geopolitical concerns, the uncertainty for companies rushing into the AI space remains whether the tech will fade into just another buzzword to watch over the next decade. “No matter how strong your technology is, if it cannot create commercial value, it is meaningless,” Yuan Hui, CEO of Nasdaq-listed AI company Xiao-I , said in June. That’s according CNBC’s translation of the Chinese. After launching a chatbot in China in the early 2000s, Yuan said the company raised money from IDG and other early-stage investors — only to find they could not simply exist as a technology leader. So he said the company spent the last decade or so working on how to integrate the tech with different kinds of businesses, including smart homes and autonomous driving. Their conclusion? Call centers proved the most viable application, Yuan said. Shanghai-based Xiao-I lists major Chinese banks and a telecom operator among its many business partners. However, publicly disclosed figures show the AI company only made net revenue of $48.2 million in 2022, with a net loss of $6 million. In late June Xiao-I launched what it calls China’s own ChatGPT – named “Hua Zang.” The company gave a chatbot demonstration on stage in English and Chinese. They’re not opening it to the public en masse, still focused on selling customized chatbot services to businesses. OpenAI’s chatbot isn’t officially operable in China, but a similar ChatGPT craze has swept the country. Beijing is watching, and on Aug. 15, new rules take effect requiring public-facing generative AI services to protect personal data and intellectual property. But in a reprieve for the industry, the final version doesn’t include a blanket license requirement. Top leaders have also talked up support for AI development overall in the country.
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