Foreign investors favor China’s cheap valuation of AI

This report is from CNBC’s The China Connection newsletter this week, delivering insights and analysis on the powerhouse of the world’s second-largest economy. You can subscribe here.

Sitting in his new office in Beijing, Eric Guo, founder and CEO of AI2 Robotics, reflects wistfully on the challenges of raising capital in China, noting that U.S.-based humanoid rival Figure Inc. recently raised a $1 billion round at a valuation of $39 billion.

This amount is far higher than what Chinese robotics companies typically raise.

What is his growth strategy? Achieve more with less.

This means, for example, developing robot AI models that use less than 10% of the parameters required to train Alphabet’s RT-2 AI model, as described in one of Guo’s widely cited papers. Mr. Guo holds a Ph.D. A graduate of Purdue University, he previously worked at Microsoft, smartphone maker Oppo, and electric car company Xpeng.

This reflects how DeepSeek and other Chinese companies have been able to reduce AI costs for their users and claim AI development budgets far below OpenAI’s estimated spending of over $100 billion. This strategy is enough to make AI2 Robotics one of the hottest investments in China.

The Shenzhen-based startup reached a $1 billion valuation this fall, reaching unicorn status just over two years after its launch — thanks to a whopping nine funding rounds so far this year, according to people familiar with the matter.

The US’s notable AI trade is alphabet Just weeks after Warren Buffett’s remarks, the latest AI models received rave reviews this week. Berkshire Hathaway Revealed an unusual technical position in stocks. Michael Varley, known for pointing out the US housing collapse before 2008, on Monday became the latest speaker to warn of the risk of a bubble in the US AI names that have driven the recent market rally.

But whatever excitement there is in China’s high-tech sector pales in comparison to that in the United States.

U.S. venture deals in AI and robotics have more than quadrupled since 2023, reaching more than $160 billion so far this year, according to a CNBC analysis of PitchBook data.

Similar transactions in China this year amounted to just over $10 billion, only slightly higher than the $9.24 billion recorded in 2023, according to the data.

This is a combination of Chinese regulatory pressure, U.S. export controls and a rough startup environment where locals have weathered harsh pandemic lockdowns to stay competitive.

Interest from investors around the world is increasing.

Vincent Lu, partner and head of private equity at Australian asset management firm Bowman Group, said bubble risk for Chinese AI companies appears to be much more contained than in the United States. The Melbourne-based company oversees A$910 million ($591.26 million), most of it allocated to Australia and North America, and participated in funding rounds for US-based Anthropic earlier this year and OpenAI last year.

Mr Lu was “very intrigued” by China’s AI and robotics scene, returned to Shanghai from Melbourne last year to scout deals, and has just started working hard on some deals. Chinese companies’ AI valuations are about a quarter of their U.S. peers, he added, while benefiting from lower R&D costs.

Bowman’s Lu was just one of many investors who attended the AVCJ Forum in Hong Kong last week and told CNBC how excited he was about how cheap Chinese AI startups were priced compared to their American counterparts.

This marks a continued resurgence in foreign investor interest in China following the Chinese government’s crackdown on major internet technology companies in recent years and U.S. government scrutiny of China-related investments.

This month alone, at least three China-based AI-focused funds raised USD-denominated funds from overseas investors.

Monolith Capital, which backed DeepSeek rival Moonshot AI, raised $488 million for two funds (one denominated in Chinese renminbi and the other in US dollars), without disclosing the details. Foreign participants in the USD Fund also included institutions from the United States, Singapore, Europe and the Middle East, a company representative told CNBC. Source Code Capital, the venture capital firm that backs ByteDance and Meituan, raised an even bigger $600 million. Blue Pool Capital, backed by Alibaba co-founder Joe Tsai, is targeting $750 million as the first fund to tap outside capital for direct investments, according to the Financial Times.

Venture companies raise money from outside investors, known as limited partners, who invest the money in startups and earn annual fees. Once a startup goes public or is sold at a higher valuation, the VC firm can “exit” and share the profits with its limited partners.

The numbers don’t seem huge yet, but momentum is building. Monolith claimed that investors were willing to put more than $600 million into the latest funding round, but it kept its original cap of $488 million.

Funding of this size was “unthinkable” just a year ago, said Johnny Zou, co-chairman of Primavera Venture Partners, adding that U.S. investor sentiment towards China has seen a “clear recovery”, helped by relatively visible exit paths.

Although Chinese companies have yet to resume IPOs in the United States, they have flocked to Hong Kong, making the Hong Kong stock exchange the world’s biggest listing destination this year.

Still, stock investors are relatively wary of China than the United States.

of Hang Seng Indexincluding AI heavyweights alibaba and tencentThe stock is up nearly 30% so far this year, but its price-to-earnings ratio remains at a modest 13.61, according to FactSet data. In contrast, the Nasdaq Composite Index trades at 33.8x, and the index is up almost 20% since the beginning of the year.

Young Liu, chairman of Honghai Technology Group, likened the story of the AI ​​bubble to the dot-com bubble, saying that the world’s top technology companies will eventually become AI-related companies.

EQT Asia Chairman Jean-Eric Salata and CEO Per Franzen discussed the company’s focus on Asia and outlined the strategy it is pursuing in the region.

Yum China CEO Joey Watt said the company plans to accelerate store openings in China and that the country’s urbanization is not yet complete.

Phone call between Trump and Xi. The presidents of the United States and China indicated on Monday night that a one-year trade ceasefire will remain in place amid rising tensions between China and Japan over Taiwan.

Concerts in Japan will also be cancelled. At least two performances in Beijing were abruptly canceled last week amid a growing Chinese backlash over Japan’s high-profile comments about Taiwan.

The number of downloads of Alibaba AI apps is rapidly increasing. The company’s new Qwen app reported more than 10 million downloads in a week as the pivot to AI gains momentum.

China’s CSI 300 index rose 0.74% as of 2:30 pm local time on Wednesday. The index is on track to end a two-week losing streak and has gained 1.53% so far this week. The benchmark has increased 14.9% since the beginning of the year.

hong kong Hang Seng Index The stock rose 0.25%, up 2.9% for the week, recovering from last week’s decline due to a global sell-off in tech stocks. The major stock index has increased 29.4% since the beginning of the year.

The offshore yuan last traded at 7.077 yuan against the dollar, its highest level since October 2024.

— Nur Hikma MD Ali

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