China’s low-cost AI chatbot has the potential to drive corporate earnings higher in the coming year, helping deliver further upside to its technology sector equities

In understanding modern technology, it is always useful to distil hard-to-understand concepts into everyday, layman views. To understand the impact of China’s low-cost Artificial Intelligence (AI) chatbot, DeepSeek, which has taken the world by storm since it emerged in the public domain in late January as the main competitor to US rival ChatGPT, I would put the beneficiaries under the following banners: volume, speed and performance.

Surging usage

Let’s take volume first. The number of DeepSeek users in China has jumped much faster in the weeks since introduction compared with previous AI apps. In fact, DeepSeek has seen as much daily usage in the first two months since introduction as what the next most popular app has seen in 12 months. The surging use of such chatbots helps companies that are developing so-called Large Language Models (LLM) (AI programmes that can recognise and generate text, among other tasks) or providing so-called cloud services, such as data storage, back up and other computing and project management tools, to consumers and businesses. Also, surging volume helps telecommunication service providers because they get more revenue from selling internet data packages to large-scale data centres that offer their computing resources.

Benefits of speed

The second impact is through speed. One of the direct commercial applications of DeepSeek is helping automobile companies develop smart driving tools. DeepSeek’s so-called R1 model reinforces these companies’ learning tools, helping autonomous driving models to improve their mean time between failures(a measure of reliability of a system or component). Some experts estimate that, with the use of DeepSeek’s R1 model, training efficiency of such tools can be significantly enhanced, slashing training time by as much as 50%.

Improving performance

The final impact is through performance. DeepSeek, through the significant improvement in speed and the sheer increase in possibilities it can learn, can also enhance autonomous driving’s performance, especially when drivers face unexpected and unknown situations. Producers of AI-enabled personal computers and AI-enabled smartphones are also likely to benefit as customers need to replace their existing equipment to avail of the newly introduced AI-enabled functions.

Meanwhile, computer software providers are likely to benefit from increase in efficiency and dramatic cut down of error rates.

How much has been priced in?

China’s technology sector stocks have surged since the emergence of DeepSeek earlier this year amid optimism that the low-cost chatbot will structurally boost economic and earnings growth in the coming years. The equity market appears to have priced in a significant rise in upcoming earnings, judging from the sharp move higher in the Hang Seng Index, from below 19,000 when DeepSeek emerged in the public domain in late January to the current 23,500 level. However, the Hang Seng Index is still trading at 46% discount compared to global equities, or more than one standard deviation from its 10-year average.

Thus, while there could be a technical correction coming up for Chinese equities, potentially towards 21,600 for the Hang Seng Index, we would use any such dip as an opportunity to add exposure to the Hang Seng Technology Index, where we have been bullish since the end of October 2024.

(Daniel Lam is Head of Equity Strategy at Standard Chartered Bank’s Wealth Solutions Chief Investment Office)