China AI supply-chain IPOs hold firm despite valuation pullback, Citi says

• Chinese AI hardware companies have established manufacturing footprints outside mainland China to better serve global clients and reduce geopolitical risks
• Market focus is expected to shift in 2024 from pure hardware suppliers to AI model and application developers, though these companies must demonstrate proven business models with strong growth and profitability
• Hong Kong listings benefit from roughly even split between domestic Chinese and international investor demand, with rising southbound capital from mainland China providing key liquidity support

Summary: China AI Supply-Chain IPOs Remain Resilient Despite Valuation Concerns

Chinese AI supply chain companies are expected to maintain strong IPO performance in Hong Kong despite recent valuation pullbacks and increased scrutiny, according to Simon Yuen, Citi's head of China investment banking.

Key Market Performance:

• 118 firms went public in Hong Kong in the first nine months of the year
• Raised HK$388 billion ($49.4 billion), representing 106% year-over-year growth
• Chinese tech funding demand serves as primary driver

Market Resilience Factors:

Hong Kong listings benefit from roughly even split between domestic Chinese and international demand, providing cushion against volatility. Rising southbound capital flows from mainland China are emerging as a crucial buying force, creating a supportive local liquidity pool.

Strategic Positioning:

Chinese hardware suppliers have benefited from the global AI infrastructure boom through both sales volume growth and higher unit prices. Many companies have proactively established manufacturing operations outside mainland China to better serve global clients and reduce geopolitical risks.

Market Outlook:

Yuen projects Hong Kong's equity capital markets will shift focus in 2024 from pure hardware toward Chinese AI model and application developers. However, these companies must demonstrate proven business models with strong growth and profitability metrics.

Risks:

Despite positive momentum, Yuen cautioned that significant volatility in the U.S. AI market could impact Hong Kong. Recent pullbacks affecting data center companies, originating from U.S. markets, demonstrate interconnected global market dynamics.

The outlook suggests continued strength in Chinese AI supply chain IPOs, supported by diversified demand and strategic geographic positioning, though remaining vulnerable to broader U.S. market cycles.