China’s military modernisation

Zhongji Innolight fell on its trading debut after Hong Kong’s biggest initial public offering in seven years amid souring appetite worldwide for Artificial Intelligence (AI) shares.The stock closed down 2 per cent after earlier plunging as much as 10 per cent. Shenzhen-listed shares of Innolight, which supplies AI data-centre operators such as Amazon and Alphabet, tumbled 9.2 per cent, extending declines from a June peak to 38 per cent. Prior to the sell-off, the stock had surged almost 10-fold in two years.Innolight’s slump came even after management tried to buoy stock prices with a potentially 8 billion yuan (US$1.2 billion) buy-back of its Shenzhen-listed shares, a call with investors to reassure them about market demand, and an IPO price that was below the maximum sought and an 11 per cent discount to the mainland stock. That still wasn’t enough to weather rising investor concerns about the outlook for AI spending, which has seen South Korea’s chip-dominated Kospi index plunge 39 per cent in about six weeks.Shandong-based Innolight raised HK$53.4 billion (US$6.8 billion) in its IPO, the second-biggest in Asia this year and Hong Kong’s largest since Alibaba in 2019. The offering attracted 33 cornerstone investors, including Singapore’s Temasek, Abu Dhabi Investment Authority, South China Morning Post owner Alibaba and Tencent Holdings.Innolight makes optical transceivers, which convert data into light pulses. Its two main rivals in China, Eoptolink and TFC Communication, are both working on plans for Hong Kong listings.Smart-driving tech maker NASN Intelligent Tech began marketing its Hong Kong IPO on Thursday, seeking as much as HK$644 million, according to Reuters. The company, part-owned by battery maker CATL, may debut on August 7. Fast-fashion giant Shein has also published a prospectus for a listing in the city.Related news: Long-term bond yields rose (as prices fell) in the United States after the Federal Reserve voted to hold interest rates at 3.50 per cent to 3.75 per cent on Wednesday. The sell-off came as investors began to question new Fed chief Kevin Warsh’s commitment to curbing inflation. Three board members voted in favour of a rate increase. kept its base rate unchanged at 4 per cent on Thursday. The city’s rates move in lockstep with the US due to a currency peg. Beijing condemned a US ban on imports of robots and power inverters, two industries that China dominates. “China has consistently opposed the US broadening the concept of national security to suppress Chinese companies,” a foreign ministry spokesman said on Wednesday. The US Federal Communications Commission announced the ban on Tuesday, citing national security concerns. It didn’t specifically mention China. The order covers advanced robotic devices, such as humanoids and quadrupeds, along with inverters, which are vital in connecting renewable energy sources to power grids. Six of the world’s 10 most innovative start-ups in humanoid robots are based in China, researcher LexisNexis said this week. How others reported it Capex concerns: “Before July, global investors showed strong appetite for AI infrastructure ‘picks-and-shovels’ names like Innolight, leading to crowded positioning,” said Charlie Hong, founder and CIO of Logos Asset Management. “While the long-term story remains intact, near-term confidence has softened amid concerns over hyperscaler capex and technology timing.” (Bloomberg News) Shock and awe: I think it’s fair to say that even the leading AI innovators have been shocked by the power of simple arithmetic operations applied repetitively to massive amounts of data. But even amazing technologies don’t necessarily yield big returns to investors. (Paul Krugman, Substack) Sentiment driven: “The sell-off is not driven by fundamental deterioration. This is a liquidity- and sentiment-driven event, fuelled by the forced unwinding of single-stock leveraged ETFs across Korea, US, HK and UK, making the move sharper and more extreme than warranted by fundamentals,” said Peter Kim, senior managing director at KB Securities in Seoul. (Tekedia) Stretched valuations: Some analysts say Chinese tech valuations are, if anything, more stretched than Korea’s, resting on a domestic-substitution story that assumes China’s champions deserve to trade like Nvidia’s ecosystem without Nvidia’s numbers behind them. When that trade wobbles, Chinese tech doesn’t need a direct financial link [to South Korea] to catch the chill. (The Wall Street Journal) Hardware exit: “The whole global narrative between AI software and AI hardware is oscillating a lot,” said [Jason Lui, head of Asia-Pacific equity and derivative strategy at BNP Paribas]. “For the past three weeks, it’s been about getting money out of hardware and moving it into the underperformers.” (Financial Times) The SCMP Plus takeawayZhongji Innolight arrived at the Artificial Intelligence (AI) party just as the punch bowl was running dry and guests were looking for their coats.It’s easy to imagine that there would have been a first-day surge had Innolight come to market a couple of months ago when AI was the stock market’s hottest ticket. Investors would have stampeded towards an AI “picks and shovels” maker that supplies US Magnificent Seven names Alphabet (Google), Amazon, Meta and Nvidia, along with Chinese tech giant Huawei Technologies. These five companies provided 81.9 per cent of Innolight’s first-quarter revenue and 76 per cent of annual sales last year.Now, however, investors’ dreams about boundless AI profits have turned to concerns about long-term returns and scepticism about whether vast data-centre buildout plans will ever come to fruition. For evidence, look no further than South Korea. The Kospi index has nosedived in recent weeks after tripling in a year, largely due to a reversal of fortunes for AI chipmakers Samsung Electronics and SK Hynix.Innolight has benefited from the AI boom as it makes optical transceivers, which connect fibre optic cables to network hardware, such as routers and switches. The devices aid data transmission by converting electrical signals into pulses of light, and then back again. Using light signals allows data to flow faster and farther than relying on copper wiring, in which electricity fades rapidly. Huge amounts of data can be transmitted through light pulses, which flash on and off millions of times or more a second.Data centre operators, such as Amazon and Alphabet, use transceivers to link clusters of Nvidia chips in servers and storage systems. These huge computing facilities then support the use and training of AI models.AI hyperscalers are rushing to build more data centres, fuelling demand for transceiver makers, such as Innolight. US tech giants have announced capital expenditure (capex) plans totalling as much as US$725 billion for this year alone, fuelled by AI infrastructure, according to Bloomberg News.Earlier in the year, stock buyers loved these AI ambitions. Now, they’ve turned increasingly nervous.Facebook owner Meta, for instance, plunged 10 per cent on Wednesday as investors fretted about AI spending and a slump in free cash flow to US$784 million in the second quarter from US$12 billion in the preceding three months. Record quarterly earnings provided little comfort. (Free cash flow is calculated by subtracting capex from cash generated by operations.)Similarly, Alphabet fell by 7 per cent last week after raising capital spending plans this year to as high as US$205 billion from US$190 billion. The Google owner also posted negative quarterly free cash flow for the first time since going public more than 20 years ago, according to Bloomberg data. Again, investors weren’t in the mood for good news, such as better-than-expected revenue growth fuelled by an 84 per cent boom for the cloud division.Elon Musk’s Tesla also suffered a record weekly decline, dropping 18 per cent, after reporting disappointing earnings – including negative free cash flow of US$1.1 billion in the second quarter.South Korean stocks have been at the forefront of the AI sell-off because chip giants SK Hynix and Samsung make up half of the benchmark Kospi Index by market weight. Both have plunged in recent months, including a 19 per cent two-day slump for SK Hynix this week after a sixfold jump in operating profit failed to satisfy investors. A 250-fold jump in chip profits also wasn’t enough to prevent Samsung shares falling on Thursday.The ongoing rout contrasts markedly with earlier in the year, when AI names posted stellar first-day gains after Hong Kong IPOs. Shares in AI developer MiniMax doubled on its first day of trading in January. GigaDevice Semiconductor and Shanghai Sunmi Tech were among other names to surge on debut.AI bulls will argue that the sell-off has created a host of buying opportunities, with market leaders in a growing sector available at bargain prices. The SOX index of US chipmakers, for instance, now trades at 48 times earnings versus over 80 last month, according to Bloomberg data. Makers of AI equipment have also pointed to bulging order books and long-term contracts with customers in a bid to allay concerns about weakening demand and potential order cancellations.Innolight made a similar argument this week on an emergency call with investors, when it rejected suggestions that product prices are declining. It also announced plans to buy back some of its mainland A shares in a bid to prop up stock prices.That seemingly wasn’t enough to lure investors back as the AI party winds down.