Who Will Be the Next AI Tenfold Stock?

The past few months have seen an impressive surge in the A-share market, largely fueled by the fast-paced development of artificial intelligence (AI). The rise has resulted in the emergence of Hongbo Shares as the first tenfold stock in the AI sector on China’s A-share market, marking a significant turning point for investors and industry observers alike.

As of September 19, 2023, Hongbo Shares have experienced remarkable growth, boasting an increase of nearly five times this year aloneThis impressive performance places it at the top of more than 5,000 listed companies in the A-share marketFurthermore, since hitting a low point in May 2022, the stock has skyrocketed, exhibiting a staggering tenfold rise, thus establishing itself as a pivotal player in the AI investment landscape.

Typically, significant technological innovations create opportunities for shares to soarAs the AI wave continues to gather momentum, the capital market seems poised for more wealth-generating phenomenaInvestors are left curious about which company might follow Hongbo’s lead and become the next tenfold stock within this burgeoning sector.

The transformation story of Hongbo Shares is emblematic of how a corporate pivot can drive a stock’s performanceBefore 2022, the company had no direct ties to the AI sectorKnown as one of China’s largest commercial ticket printing enterprises, its core business focused on various printing services, including book printing, high-end packaging, and lottery ticket printing, with the printing business accounting for as much as 89.4% of its revenue.

Recognizing the challenges posed by the digital age, Hongbo’s management understood that the printing industry was on the decline and began pondering a transitionSince 2017, the company began to branch out into digital technology, exploring realms such as big data, mobile gaming, RFID smart label production, and IoT services, and even ventured into 5G—though these attempts met with limited success and little improvement in financial performance up until that time.

Between 2018 and 2021, the company’s revenue fell by 20%, with its net profit excluding non-recurring income also registering a continuous decline, placing it in a precarious position

Advertisements

The turning point for the company came with a collaboration with tech titan Nvidia, initiated through the efforts of Zhou Weiwei, a former senior vice president of 36Kr and a tech and finance journalist.

In August 2022, Hongbo appointed Zhou as general manager of its wholly-owned subsidiary, Inbo Digital TechnologyA partnership agreement was announced that included the establishment of an AI Innovation Empowerment Center in Beijing, formed in cooperation with both Nvidia and Zhongheng Culture.

Public records indicate that the AI Innovation Empowerment Center's main infrastructure includes a computing center with expected total investments exceeding 800 million yuan for the purpose of providing public computing resources to AI companiesThe facility’s first phase comprises a standard unit of supercomputing servers, integrating 20 Nvidia 80GB DGX servers capable of delivering 100 petaflops of processing power.

Signing a partnership with Nvidia has undoubtedly positioned Hongbo as a significant player within the current AI development landscapeAs a leading producer of graphics processing units (GPUs), Nvidia's AI chips are noted for their exceptional computational capabilities, regarded as crucial infrastructure supporting the growth of AI, thereby drawing considerable interest from the global tech community.

After an impressive performance in the first quarter, Nvidia reported an equally outstanding second-quarter earnings report on August 24, 2023, which once more exceeded market expectationsThe figures stand in stark contrast when compared to other established competitors, reflecting Nvidia's unparalleled growth in the AI chip sector.

In the second quarter of 2023, Nvidia's data center revenue soared past 10 billion dollars, a staggering 171% year-on-year increase, juxtaposed against Intel's 4 billion dollars—15% lower compared to the previous year—and AMD's 1.3 billion dollars also dipping by 11%.

Prior to 2023, the share of data center CPU products had significantly surpassed that of GPUs

Advertisements

However, in the current AI-driven era, Nvidia's AI accelerator chips have eclipsed general-purpose processing units, establishing a new trajectory for the industry.

Following the strategic partnership with Nvidia, Hongbo has begun to carve a notable path in its transformation journeyIn the first half of 2023, the company reported a year-on-year revenue growth of 25.7%, with second-quarter revenue increasing by 30.8%. Notably, the company's gross profit margin for the first half of this year reached 23.6%, up by 17.5%. The second-quarter gross profit margin surged to 27.89%, reflecting a remarkable year-on-year growth of 58.2%.

Yet, the current performance metrics alone do not fully explain Hongbo's explosive stock market riseAs a bridge between Nvidia and its computing clients, the potential for Hongbo, having pivoted to computing resource leasing, represents the backbone of market valuationDue to an undeniable demand for Nvidia's AI chips, Inbo Digital—which is outfitted with top-tier chips like the H100—has emerged as a high-performance alternative, brimming with prospective financial elasticity.

Historically speaking, the rapid increase in a listed company's stock price often correlates to explosive revenue growth, which can materialize under certain conditionsThree scenarios are particularly prevalent:

The first involves abrupt spikes in demand due to unforeseen eventsThe COVID-19 pandemic, for instance, led to a rise in demand for testing and protective gear, giving birth to stocks like YF Medical and Ji'an Medical, which saw their values skyrocket.

Nevertheless, companies experiencing such temporary booms in performance may find their gains unsustainable, with spectacular peaks likely never to be matched again, leading to significant risks when stock prices eventually retract.

The second scenario arises from the reversal of traditional cyclical industries

Advertisements

Examples include the semiconductor industry and swine farming, both of which saw explosive growth after bottoming out around early 2019, producing several tenfold stocks within a short timeframe.

However, because traditional cyclical industries operate within limited market spaces, any surge in performance and stock price can be attributed to cyclical supply and demand factors, suggesting that returns to a regular trend are inevitable.

The third scenario pertains to the explosive rise of stocks associated with emerging industries linked to significant technological revolutionsThis can be seen from the early mobile internet era featuring giants like Apple and Tencent to the newer wave powered by energy technologies boasting companies such as Tesla and Contemporary Amperex Technology.

Unlike the steady supply-demand structures in traditional industries, emerging markets demonstrate rapid demand growthCompanies endowed with competitive advantages on the supply side within these sectors tend to see sustainable performance increases, which consequently elevates stock price ceilings.

The ongoing AI surge is undoubtedly a groundbreaking technological revolution that has the potential to reshape societal standards while upgrading various industries, comparable to the transformative effects of the internet and renewable energy sectorsAlongside Nvidia's industrial network, the AI landscape may soon reflect the opportunities seen during the heights of Apple and Tesla’s growth, birthing many more tenfold stock stories.

2023 has ushered in a tech storm driven by AI that has captivated global marketsAI-related stocks are now among the hottest investment targets, as evidenced by the meteoric rise of Nvidia’s stock price—climbing over threefold this year and making it one of the best-performing tech stocks, with a market capitalization nearing 1.1 trillion dollars, which is about seven times that of the once-mighty Intel.

Among this year’s ten best-performing industry indices on the A-share market, 60% are related to AI, and in the top ten concept indices, 100% connect to AI

A staggering 80% of the top twenty stocks belong to the AI sector.

From an industrial chain perspective, the upstream segment of AI primarily consists of foundational infrastructure such as computing power providers, often referred to as the 'pick-and-shovel' players within the industryThis segment is among the most attainable for achieving revenue, leading investors to favor these companies as their growth factors are easier to realize.

Within the AI sector, several leading companies positioned at the upstream level surrounding computing resources are potential candidates to replicate Hongbo’s success.

In the PCB computing board field, numerous top Chinese firms supply components to Nvidia, with Shenghong Technology being the largest, holding approximately 50% market share for Nvidia’s graphics cards globallyFor AI servers, Shenghong has ten computing board models currently under certification by Nvidia, significantly outpacing its competitors in China.

In the CPO area, Zhongji Xuchuang is the undisputed leader, showcasing considerable advantages in 800G optical modulesSince October of last year, Zhongji has experienced a remarkable rise of nearly eightfold, tantalizingly close to the tenfold mark.

Within the packaging and testing sector, advanced packaging presents a critical choke point for AI chipsAmong China's top three packaging giants, Changdian Technology stands out with its technological prowessTongwei Fortune, tied to AMD, boasts strong prospects of benefiting from the increasing demand for AI chips, likely leading to substantial performance gains and stock price elasticity.

In the midstream segment of AI, developers of general large models operate similarly to operating systems on smart devicesDue to the extraordinary parameters involved—often exceeding the hundreds of billions—large model development necessitates substantial investment, predominantly undertaken by major tech firms such as Alibaba, Tencent, Huawei, and ByteDance.

Evaluating the value generated by operating systems such as Android and iOS, it’s not far-fetched to envision that firms achieving success in the Chinese large model competition could surpass a trillion dollars in market capitalization

Advertisements

Advertisements