China AI Lab’s 170% Stock Surge Cements Winner-Loser Pair Trade

0wzicnvt(}i5axxp(5e]ph17_media_dl_1.png Bloomberg

Article content

(Bloomberg) — A pair trade is emerging in China’s artificial intelligence sector, with investors piling into the perceived winner and betting against its rival seen as losing ground in the race to build commercially viable AI models.

Article content

Shares of Zhipu, formally known as Knowledge Atlas Technology JSC Ltd., are up 170% since the end of March in Hong Kong while MiniMax Group Inc.’s are down around 50%. A long Zhipu/short MiniMax pair trade may gain momentum in early July, analysts say, when a larger chunk of the latter’s stock will be released from an IPO lockup.

Article content

Article content

Article content

The divergence comes as imminent listings of global AI rivals intensify investor scrutiny over model quality and profitability. The two startups, among the hottest debuts in Hong Kong this year, initially rose in tandem as users were drawn by their cost-efficient models, before a slew of updates and pricing changes led to the performance gap. 

Article content

Article content

Wagering on Zhipu over MiniMax is “a very profitable trade,” said Leonid Mironov, a portfolio manager at Gavekal Capital Ltd. Zhipu’s outperformance isn’t surprising, as it has “the better model, with structurally better earnings potential. MiniMax is really not on the way to becoming a dominant platform.” 

Article content

Both stocks have done well since their trading debuts in January, boosted by Beijing’s self-reliance push despite a lack of profits at either company. The pair rank among the top three performers on the Hang Seng Tech Index this year — Zhipu is the faraway leader with its gain of more than 1,500%.

Article content

The growing preference for Zhipu shows users and investors alike are rewarding its model quality. The company has been able to maintain sales volumes while raising prices for its GLM models this year, while MiniMax slashed the charge for its newest flagship M3 by 50% just a week after launch in an effort to lure customers.

Article content

Article content

Goldman Sachs Group Inc. lowered its price target on MiniMax by 14% in a note Wednesday, citing the negative margin impact from the price cut. JPMorgan Chase & Co. analyst Olivia Xu raised her price target for Zhipu while downgrading MiniMax, calling its lower pricing a “signal of lower-than-expected model capability”.

Article content

A MiniMax spokesperson didn’t respond to Bloomberg’s query on such market views.

Article content

Meanwhile, consensus sales estimates for Zhipu have surged nearly 250% since the start of the year, surpassing the outlook for MiniMax. 

Article content

Both stocks are likely to face near-term pressure from the expiry of lockups on shares held by cornerstone investors in their IPOs. About 65% of MiniMax’s total shares will be released on July 8, compared with 6% of Zhipu’s freed for trading a day earlier, according to HSBC Holdings Plc estimates.

Article content

That may add greater pressure on MiniMax, with the larger proportion of new shares on the market making them easier and cheaper to borrow for short sellers. 

Article content

Felix Wang, tech sector head at Hedgeye Risk Management, acknowledges that “it’s popular to short MiniMax,” but argues that the companies face similar long-term challenges.