(Bloomberg) -- China's artificial intelligence companies are poised to deliver robust earnings, but elevated expectations after a months-long rally are raising the bar for tech stocks to climb further.
Most Read from Bloomberg
Thailand Scraps Plan to End Visa-Free Entry for Indian Tourists - Beckham's IM8 Gets $1 Billion From General Catalyst for Growth - CIA Says AI Drones Give Russian Troops Only 30 Minutes to Live - Chip Stocks Get Hit as AI Spending Anxiety Builds: Markets Wrap - Google Gemini Launch Delayed as Tech Falls Short of Internal Goals
A number of companies along the chip supply chain have flagged profit surges easily topping 1,000% in their preliminary reports, but stock moves have been mixed. This suggest investors have already priced in exponential earnings growth.
The CSI 300 Information Technology Index, which tracks semiconductor and electronic component makers listed on the mainland, have retreated recently after gaining 80% in the June-quarter. Valuations have also become more pricey. The CSI tech gauge trades at 36 times its one-year forward earnings, well above the 28 times in April.
"The performance of China AI stocks is more dependent on investor positioning and expectations than actual fundamentals and earnings," said Vey-Sern Ling, managing director at Union Bancaire Privee. "Investors were already anticipating a strong result."
Shares of Shannon Semiconductor Technology Co. dropped by the daily limit of 20% after it flagged earnings growth of more than 2,000%. Those of Shenzhen Techwinsemi Technology Co. also slumped by the daily limit of 10% following a forecast of as much as 5,600% in net income growth for the first half.
Memory chipmaker Shenzhen Longsys Electronics Co. flagged profit increase topping 62,200%. While its shares rose 10% on the day, it has since erased all gains.
Investors will be watching for commentary from AI firms as they report final first-half results by the end of August for further proof that higher valuations can be justified. Profit growth is expected to remain strong across AI hardware, computing infrastructure and upstream suppliers that have benefited from rising prices, according to China International Capital Corp.
Still, a slow recovery in consumer demand raises doubts about the durability of earnings growth. Automaker Seres Group Co. expects to report losses for the first half as production cost increase, while pig breeder Muyuan Foods Group Co. was hampered by fluctuation in pig prices. Meanwhile, troubled developer China Vanke Co. expects losses to widen due to low margins on development projects and asset impairment.