Deep Seek before year of the Snake

As we are winding down for the Chinese New Year holidays, the financial markets certainly are getting more exciting with the recent TikTok ban (users moving to Little Red Book (Xiaohongshu)) and the resurgence of media coverage on Deep Seek. Deep Seek is impactful since the it tanked the major tech stocks in the US, with Nvidia dropping as much as -18% in one day!

Since we are getting some enquiries from clients and friends regarding our view on the above, we thought of sharing our observations, our thoughts to our readers how it can play out in the future.

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1.) Energy and power grids are a lot more efficient and abundant in China: People can argue forever on the real energy costs in China versus the US, but based on what we have observed, China should have a significant advantage over the input costs on keeping the servers, and lights on for the AI space in China.

2.) Talents: It is an understatement to say China doesn’t have great scientists and people. There are 1.4bn people in China, and most are enjoying staying in China simply because China is a great place to live in as living costs are cheaper, streets are safer, roads are better, cars are better and housing costs are cheaper.

3.) Chips - China’s manufacturing capabilities and ability to source materials: China has been the world’s powerhouse in terms of manufacturing for many decades, and its advancement in higher end technological manufacturing and innovation has been increasing year on year.

4.) Deep Seek is a lot more efficient, using less chips, less power, and more productivity!

We are certainly not an expert in AI, but based on the historical facts of

i.) China’s rise in EV, putting European Automakers in jeopardy (Better built quality, advanced battery technology, the support of the charging infrastructure, energy costs etc)

ii.)?EUV lithography advancement by HIT (potentially challenging ASML)

iii.)?The rise in food quality, the F&B scene, and the availability of it in China to the people

iv.)?Vast improvement in transportation,

v.)?Advancement in Military equipment

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We believe this could be an important wake up call and milestone for inflated valuations to normalize as Deep Seek looks to be a much more efficient model with on par results comparing with the US versions. This could have a trickledown effect on the cooling of inflated assumption on energy/electricity companies, overly optimistic revenue projections on chip makers, but it might be positive for companies who actually benefits from the more efficient cost of the AI models, or the cooling in energy/chip prices that can increase the bottom line of companies. For China, this is not the first time for us seeing China making things which are on par, or better, at a fraction of the cost!

Given US companies have been trading at an inflated range for quite sometime, we remain the same and will not be surprised to see further downward revision on the tech sector, until the real numbers can be worked out regarding the Deep Seek effect, or how much more efficient the Deep Seek model really is, and how it can affect the projections of future earnings for various companies.

We continue to remain optimistic on the Hong Kong China markets as they still remain undervalued relative to the US markets, and Price to book Value remains to be below 1. SOE names continue to remain a good spot to stay invested in due to their low debt, stable cashflow and businesses, with high dividend payout.

In short – More head winds for the US tech space, unknown for the energy/electricity generation companies, slight negative with uncertainty for the semiconductor chips company, and more chances for upside in the HK China space!

p.s. Positive healthy competition is good between countries as Trump mentioned last night at a House Republican retreat that the launch of the AI model was “a positive development” but should be considered a “wake-up” call for U.S. industries, lauding the move for what he hoped would usher in a future of “coming up with a faster method of AI, and much less expensive method.”

May we wish everyone a good final year of the dragon, and a prosperous healthy year of the Snake!