The landscape of technology asset valuation in China is undergoing a notable transformationA prime example is Alibaba, which has seen signs of a market reassessment after a prolonged period of low valuationsOver the last week, Alibaba's stock price on the Hong Kong market rebounded by over 13%, while the Hang Seng Index rose by 5%. This rebound reflects an overall increase of more than 40% from recent lows.

However, this reassessment may only be the beginningAs discussions around Alibaba's investments in artificial intelligence (AI) and cloud computing begin to gain traction, a genuine AI-focused market rally for Chinese tech stocks could emerge, akin to the narratives surrounding the American tech giants known as MAG7.

The upcoming earnings report from Alibaba on February 20th is anticipated to spotlight the scale of investment in AI and cloud computing, which means that how Alibaba's management chooses to deploy funds could influence the trajectory of the entire sector.

Traditionally, the valuation dilemma surrounding Chinese tech stocks has not gone unnoticedBefore this rebound, Alibaba's price-to-earnings (P/E) ratio was hovering around the 10 times mark, significantly lower than the average 20 times P/E ratio observed within the US tech sectorSome analysts have pointed out that the market valuation appears to assign only a 10 times P/E to Alibaba’s e-commerce profits, neglecting to account for its cloud and AI ventures.

The undervaluation of Alibaba largely stems from three key factorsFirstly, there is a systemic underestimation of China's technological innovation capabilities

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A recent report by Morgan Stanley highlighted that global investors maintain a valuation framework rooted in traditional internet paradigms, failing to acknowledge the breakthroughs in cutting-edge technology sectors.

Secondly, investors often relegated Alibaba to the status of merely an e-commerce company, overlooking its technical advancements in cloud computing and AIThe potential value of Alibaba's cloud and AI operations was almost completely dismissed in prior valuations.

Lastly, external factors such as geopolitical tensions and other non-fundamental issues have continued to exert pressure on the company's valuations.

As China has made remarkable strides in AI technology, the consequences are expected to manifest in an industry-wide uplift in valuationsNotably, during the recent Lunar New Year, there was a sudden shift in perceptionsThe Chinese start-up DeepSeek introduced a groundbreaking open-source large language model that astonished the global tech communityThis model not only demonstrated performance on par with leading international counterparts but also significantly reduced training and inference costs, effectively bridging the technological gap between China and the United States in AI.

Shortly thereafter, on January 29, 2025, Alibaba Cloud officially unveiled the Tongyi Qwen 2.5-Max modelThis model, built upon a mixture of experts architecture and trained on over 20 trillion tokens, has made groundbreaking advances across numerous core metrics.

In evaluations conducted by the authoritative platform ChatBot Arena, Tongyi Qwen 2.5-Max scored 1332 points, ranking seventh globally

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It particularly excelled in standalone tests for mathematics and programming, achieving first place worldwide.

The releases of DeepSeek RI and Alibaba's Tongyi Qwen 2.5-Max have been pivotal turning points in shifting market viewsDeepSeek's cost-effective models challenge the prevailing notion that substantial capital investment is necessary for AI developmentIts open-source strategy, in tandem with Alibaba's initiatives, empowers additional developers to participate in AI innovation, countering the closed-source approach adopted by major players like OpenAI and furthering the democratization of AI technology on a global scale.

The success of DeepSeek and Alibaba has reignited investor interest in Chinese technology stocks and led to a reassessment of their valuationMorgan Stanley emphasized that the technical prowess of China in the AI sector is undervalued and urged investors to pay close attention to the innovative capabilities of Chinese tech companies.

Following the Lunar New Year, both Hong Kong and A-share technology sectors exhibited strong performancesStocks of Chinese AI technology firms, particularly Alibaba, have been on a consistent upward trajectory, signaling a rapid restoration of confidence in the Chinese technology market.

Recently, foreign institutions led by Goldman Sachs, Morgan Stanley, and Bank of America have shifted their attitudes toward Chinese assetsThey regard the emergence of DeepSeek as reminiscent of Alibaba's IPO moment, which catalyzed the rise of the "new economy" sector in China and attracted long-term capital inflow globallyThe ascent of DeepSeek presents mid to long-term opportunities for value reassessment among Chinese tech stocks.

Yet, the surprises brought by Chinese AI companies led by Alibaba don't stop there

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Reports have emerged suggesting that Apple and Alibaba are collaborating to develop AI features for iPhone users in ChinaThis indicates that Apple recognizes Alibaba's Tongyi Qwen model, while its overseas partners, such as OpenAI, serve as a benchmark for every AI company striving to improve.

Apple's AI architecture consists of three layers: device-side models, cloud models, and external third-party AI modelsThe first two layers are built upon proprietary hardware and software, while the third layer collaborates with OpenAI for the overseas market.

In the second half of last year, Apple faced significant challenges in the Chinese marketFinancial reports indicated that China was Apple's second-largest market, after the United StatesHowever, its performance in China has been under pressure, with sales anticipated to decline by 7.7% in fiscal year 2024 and a staggering 11% drop in Q4 of 2024.

In a recent earnings call, Apple CEO Tim Cook explicitly noted that the lack of Apple Intelligence features was a contributing factor to the declining sales in the Chinese market during Q4 last yearAs a response to this need for an AI partner in China, Apple has been searching for suitable collaborations since 2023. After evaluating numerous companies, including Baidu, Tencent, ByteDance, Alibaba, and DeepSeek, the technical strength and commercial ability of Tongyi Qwen emerged as the standout choice, presenting a substantial market opportunity that covers over 200 million iOS users in ChinaThis is a feat that many competing model companies have struggled to achieve, despite significant investments.

Moreover, DeepSeek's recent surge in popularity piqued Apple's interest; however, the tech giant ultimately passed on DeepSeek’s model due to the team’s inability to support the demands of a major client like Apple

For Apple, which places profound emphasis on user experience, it is unacceptable to have a service that produces “server busy, please try again later” responses.

Hence, having Alibaba Cloud as a backing partner positions Tongyi Qwen as a natural collaborator for AppleThe value of a cloud provider is amplified through their instantaneous scalability and ongoing software updates rather than the costs associated.

As highlighted at the beginning of this narrative, the current market valuation for Alibaba hovers around 10 times P/E based on its e-commerce profits, with little consideration for its cloud and AI segments.

However, this scenario may soon shiftRecently, Guosen Securities reported that China's AI large models, exemplified by DeepSeek, are poised to accelerate domestic cloud providers' progress toward closing the gap in model capabilitiesIt will also bolster domestic companies' migration to cloud services, enhancing demand growth for cloud providers and significantly reducing the time and resource costs associated with the early-stage investments necessary for AI applicationsAdditionally, these developments are expected to further elevate the profitability of domestic cloud providers.

In simpler terms, before the Lunar New Year, the gap between China's AI large models and those in the US could be seen as 1.5 to 2 yearsAlthough the US has already noted the surging demand for AI applications in relation to cloud computing, China still seems to be operating on a two-year-old trajectory from the US market, with demand for inference computing yet to significantly explode.

Major companies like Google, Microsoft, Amazon, and Meta have all made clear in their latest financial reports that the robust demand in AI is propelling them to increase their investments in data centers to satisfy clients' computational capacity needs

Google and Microsoft have even communicated that their cloud businesses are facing "capacity-constrained" challenges, hindering revenue growthIn simpler terms, there is insufficient computational power affecting the profitability of these cloud giantsIn North America, the combined capital expenditure for AI-related investments from these four cloud computing firms is expected to exceed an unprecedented $320 billion by 2025 (with Amazon contributing $105 billion, Meta $60-65 billion, Google $75 billion, and Microsoft $80 billion).

With the emergence of DeepSeek, the market is starting to acknowledge that China's progress with AI large models is keeping pace with the US, and the pace of cost reductions is even faster, paving the way for a scenario where China’s AI cloud computing market could soon resemble that of the US, facing supply shortages.

Wall Street investors are keenly monitoring the capital expenditures of the major American cloud providersOn one hand, this is vital to the performance of upstream hardware suppliers; on the other hand, it also reflects a growing consumer demand for inference capabilities, directly impacting the profitability of these giants.

For Chinese cloud providers like Alibaba Cloud, the America narrative shifts cloud computing from being treated as a cyclical business back to one of growth.

Previously, discussions revolved around the valuation of Alibaba's e-commerce operations, cloud profit margins, and the company’s share repurchase amountsThis suggests that even with the recent significant stock price bounce back, AI might still present a recovery narrative for Alibaba.

True movement toward a genuine AI theme market rally will only occur when the debate shifts towards how Alibaba intends to allocate its capital expenditures

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