Chinese Assets Performance and Outlook

UBS anticipates that China remains attractive for investors, despite a recent correction in tech stocks. The firm views this tech correction as an opportunity to increase exposure to the sector. Chinese tech shares, as represented by the Hang Seng TECH index, saw a decline of over 19% since early October but are expected to recover.

Key factors influencing this positive outlook include:

Government Support: Beijing is focused on self-sufficiency, increasing chip manufacturing capabilities, and subsidizing data centers, leading to an expected 26% growth in capital expenditure from major tech companies in 2026.

AI Integration: Chinese internet giants have demonstrated their ability to integrate AI into profitable business models.

Domestic Liquidity: Strong domestic liquidity remains a significant support for China's equity market.

Attractive Valuations: Chinese tech stock valuations are considered attractive, with the sector projected to deliver earnings growth of over 25% per annum over the next two years.

However, some Chinese tech stocks, including Alibaba and JD.com, experienced weakness due to thin holiday trading volumes and disappointing economic data, signaling that the market can be volatile.

Baidu's Market Outlook

Baidu Inc. (NASDAQ: BIDU) has seen a significant stock increase, with its U.S.-listed shares rising by approximately 15.03% following the announcement of a proposed spin-off and separate listing of its AI chip unit, Kunlunxin (Beijing) Technology Co., Ltd., on the Main Board of the Hong Kong Stock Exchange. This move is aimed at unlocking hidden value and attracting investors to the AI chip sector.

Key Developments for Baidu:

Kunlunxin Spin-off: Baidu's non-wholly owned subsidiary, Kunlunxin, is pursuing a separate listing to highlight its independent value, broaden financing channels, and enhance management accountability. A confidential listing application has been submitted, though the spin-off is subject to regulatory approvals and is not assured to proceed. Kunlunxin is expected to remain a subsidiary of Baidu after the spin-off.

Stock Performance: Baidu's stock rallied significantly on this news, trading near its 52-week high. The market capitalization increased by about $6 billion on the day the news broke.

Undervaluation: The spin-off is seen as a way to unlock value for Baidu, which some analysts suggest may be undervalued based on sum-of-the-parts calculations. Some estimates place Baidu's fair value significantly higher than its current price.

AI Strategy: Baidu's aggressive AI strategy has driven investor optimism, with its stock gaining 58% in the 12 months prior to this announcement. Kunlunxin, Baidu's in-house AI chip unit, saw revenues exceeding 3.5 billion yuan ($500 million) last year and is expected to have external customers contribute over half of its revenue in 2025. JPMorgan analysts forecast Kunlunxin's chip sales to rise sixfold to 8 billion yuan by 2026.

Financial Performance and Challenges:

While the spin-off creates positive sentiment, Baidu's recent financial reports have shown some mixed results:

Annual (2024): Total Revenue was 133.125 billion CNY (down 0.0109% YoY), Net Income was 23.172 billion CNY (up 0.1824% YoY), and Diluted EPS was 66.253 CNY (up 0.1988% YoY). Baidu ranked high within the Online Services Industry for Net Income, Diluted EPS, and Total Revenue.

Quarterly (2025-Q3): Baidu reported a net loss of 11.232 billion CNY (down 2.4717% YoY) and negative diluted EPS of -33.1205 CNY (down 2.5129% YoY). Operating income was also negative. Revenue slightly beat estimates, but EPS and Net Income significantly missed expectations.

Margin Pressure: The latest quarterly results underline the capital-intensive nature of the AI transition and concerns about ongoing margin pressure from heavy AI and cloud investments [11]. Weakness in the core digital advertising space is also a concern.

Conclusion

The market outlook for Baidu is influenced by the potential value unlocking from the Kunlunxin spin-off and its strong positioning in the AI sector. This strategic move could solidify Baidu's role as a full-stack AI infrastructure provider. However, investors should also consider the recent quarterly financial performance, which showed significant losses and misses on analyst expectations, indicating that the path to profitability from AI investments may still face challenges. The overall sentiment for Chinese assets in 2026 appears cautiously optimistic, driven by government support for tech, AI integration, and attractive valuations, despite some recent market volatility.