Foreign investors warm to China’s cheaper AI valuations

This report is from this week’s CNBC newsletter The China Connection, bringing you insights and analysis into what’s driving the world’s second-largest economy. You can subscribe Here.

Sitting in his new office in Beijing, AI2 Robotics Founder and CEO Eric Guo somberly reflected on fundraising challenges in China, noting that US-based humanoid rival Figure recently raised $1 billion in a single round. $39 billion valuation.

That’s much more than what a Chinese robotics company would typically raise, he said..

Growth strategy? Do more with less.

That means developing a robotic AI model that uses, say, less than 10% of the parameters needed to train Alphabet’s RT-2 AI model, as noted in one of Guo’s widely cited examples. documents. Guo, who holds a Ph.D. from Purdue University, and previously worked at Microsoft, smartphone maker Oppo and electric vehicle company Xpeng.

This reflects how DeepSeek and other Chinese players are lowering AI costs for users, allowing them to charge AI development budgets well below OpenAI. estimated spending exceeds $100 billion. This strategy is enough to make AI2 Robotics one of China’s hottest investment targets.

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

The US’s hot AI trade has shifted to: Alphabet I’m following this week rave reviews Launch of newest AI model — just weeks after Warren Buffett’s model Berkshire Hathaway announced a rare tech position in the stock. Michael Burry, who called out the US housing crash before 2008, became the latest voice to warn of bubble risks in US AI names, which have supported recent market gains on Monday.

But whatever progress China’s tech sector makes, it pales in comparison to the US

U.S. venture deals in artificial intelligence and robotics have more than quadrupled since 2023, topping $160 billion so far this year, according to CNBC’s analysis of PitchBook data.

Comparable deals in China this year totaled just over $10 billion, the data showed; this figure is only slightly more than the $9.24 billion recorded in 2023.

It’s a combination of regulatory pressures in China, U.S. export controls and a shaky startup environment where locals are overcoming strict pandemic restrictions to remain competitive.

The interest of global investors is increasing.

Vincent Lu, partner and head of private equity at Australian asset manager Boman Group, said bubble risks for Chinese AI firms appeared much more limited than in the US. The Melbourne-based firm manages AU$910 million ($591.26 million) mostly allocated to Australia and North America, and has participated in funding rounds for US-based companies. Anthropic earlier this year And OpenAI last year.

Lu was “so impressed” by China’s AI and robotics scene that he moved back to Shanghai from Melbourne last year to scout deals, and is only just starting to get serious about a few of them. He added that Chinese companies’ AI valuations are about a quarter of their American counterparts, but they benefit from lower research and development costs.

Boman’s Lu was just one of many investors who told CNBC at the AVCJ forum in Hong Kong last week how excited they were about how cheaply priced Chinese AI startups are compared to those in the United States.

these signs There is a continued recovery in interest from foreign investors in China following Beijing’s crackdown on major internet technology companies in recent years and Washington’s scrutiny of China-related investments.

• Monolith Capital, which backs DeepSeek rival Moonshot AI Raised $488 million for two funds, one denominated in Chinese yuan and the other in US dollars, without any breakdown being disclosed. A company representative told CNBC that foreign participants in the U.S. dollar fund include institutions in the United States, Singapore, Europe and the Middle East.
• Source Code Capital, the VC firm behind ByteDance and Meituan, raised even more – $600 million.
• Blue Pool Capital, backed by Alibaba co-founder Joe Tsai Target is 750 million dollars For the first fund to use external capital for direct investments, according to the Financial Times.

Startup companies raise capital from outside investors, known as limited partners, and earn annual fees as they put that money to work in startups. When startups go public or are sold at higher valuations, venture capital firms can “exit” and share the proceeds with their limited partners.

While the numbers don’t look big yet, momentum is building. Monolith claimed Investors sought to contribute more than $600 million to the latest fundraising round but maintained the initial cap of $488 million.

Funds of this size would have been “unimaginable” just a year ago, said Johnny Zou, co-chairman of Primavera Venture Partners, adding that American investor sentiment towards China has seen a “clear rebound”, helped by relatively visible exit paths.

While Chinese companies have yet to pursue U.S. IPOs, they have flocked to Hong Kong, making the exchange the world’s biggest listing destination this year.

Still, stock investors are relatively more cautious about China than the US

Hang Seng IndexFeatures AI heavyweights Alibaba’s And TencentIt’s up nearly 30% so far this year but is trading at a modest price-to-earnings ratio of 13.61, according to FactSet data. The Nasdaq Composite, by contrast, is trading at 33.8 percent, and the index is up almost 20% so far this year.

Young Liu, chairman of Hon Hai Technology Group, likened the talk about the AI ​​bubble to the dot-com bubble and said that the world’s top technology companies will eventually be related to AI.

EQT Asia Chairman Jean Eric Salata and CEO Per Franzen discussed the company’s focus on Asia and outlined the strategies it follows in the region.

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

Trump-Xi meeting. The presidents of the United States and China signaled this on Monday night. A one-year trade truce remained intact as tensions flared between Beijing and Tokyo over Taiwan.

Alibaba AI app downloads are on the rise. The company’s new Qwen app has multiple reports 10 million downloads In a week as the AI ​​pivot gains momentum.

of hong kong Hang Seng Index rose 0.25%, rebounding from last week’s decline amid a global tech sell-off, and was up 2.9% for the week. The main stock gauge is up 29.4% year to date.

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