China's Mid-Cap AI Stocks: A Strategic Revaluation at the Crossroads of Global Capital and Domestic Innovation

The recent visits to China's AI ecosystem by U.S. investors like Capital Group and Thrive Capital mark a pivotal shift in global sentiment toward Chinese mid-cap tech firms. Once overlooked due to geopolitical tensions, these companies now stand at the forefront of a revaluation wave driven by disruptive innovations like DeepSeek's R1 model and Beijing's aggressive AI investment agenda. For investors, this is a rare opportunity to capitalize on undervalued mid-cap firms poised to benefit from both domestic growth and foreign capital inflows—before broader recognition crystallizes into higher valuations.

A New Era of Global Investor Interest

The tours by U.S. firms to China's AI hubs in early 2025 underscore a tectonic shift in perception. While U.S. policymakers remain wary of funding Chinese tech advancements, investors are now prioritizing returns over ideology. DeepSeek's R1 model, which rivals OpenAI's capabilities at a fraction of the cost, has become a symbol of China's ability to leapfrog Western competitors in AI.

This breakthrough has drawn scrutiny—and curiosity—from global capital. Thrive Capital's delegation met with Chinese AI startups, while Capital Group's executives explored partnerships with firms like Shenzhen-based DEEP Robotics, a mid-cap leader in embodied AI for healthcare. Though neither firm has committed to investments yet, their visits signal a thaw in sentiment toward China's mid-tier tech ecosystem.

Domestic Innovation: The Engine of Revaluation

China's AI renaissance is not confined to state-backed giants like Alibaba or Tencent. Mid-cap firms are the unsung heroes of this revolution, leveraging low costs and agile R&D to disrupt global markets. Take Will Semiconductor (HK:02269), a mid-cap chip designer now supplying AI accelerators to DeepSeek, or Butterfly Effect, a Singapore-based startup with Chinese founders that raised $400 million for its AI service Manus. These companies thrive in ecosystems like Hangzhou and Shenzhen, where government policies, academic talent, and venture capital converge.

The Zhejiang University analysis of Hangzhou's “Six Little Dragons” (including DeepSeek and DEEP Robotics) highlights how mid-caps are pioneering open-source AI models and robotics, bypassing U.S. chip export restrictions by developing cost-effective alternatives. Meanwhile, Shenzhen's 2027 robotics ambition—backed by RMB1.4 trillion in government AI funding—ensures these firms will remain in the spotlight.

Valuation: A Bargain for Global Investors

Chinese mid-cap AI stocks remain underfollowed by international investors, offering a valuation gap compared to U.S. peers. The MSCI China Mid Cap Index trades at 11.5x forward P/E, nearly half the S&P 500's 20x multiple, despite faster AI-driven growth prospects.

Consider DeepSeek: its R1 model outperforms U.S. rivals in coding tasks at $5.6 million R&D cost—90% cheaper than OpenAI's GPT-4. This efficiency creates a moat for mid-caps to dominate cost-sensitive markets, from Southeast Asia to Africa.

Investment Thesis: Act Before Mainstream Recognition

The catalysts are clear:
1. Foreign Capital Inflows: U.S. firms' visits signal the start of a trend. As investors like Capital Group and Thrive Capital pivot from passive avoidance to selective engagement, mid-caps will gain liquidity and visibility.
2. Domestic Tailwinds: Beijing's AI infrastructure spending and “Made in China 2025” policies are funneling capital to mid-tier firms in robotics, autonomous driving, and cloud services.
3. Underfollowed Opportunities: Few analysts cover mid-cap AI stocks, leaving room for upside surprises as earnings improve.

Top Picks for 2025:
- Will Semiconductor (HK:02269): Critical for AI chipsets; undervalued at 8x forward P/E.
- DeepSeek: Leverage its R1 model through partnerships with listed firms like Zhejiang Lab (via ETFs tracking Hangzhou tech hubs).
- DEEP Robotics: Focus on healthcare AI, a sector with 20% annual growth potential in China's aging population.

Risks to Consider

• Geopolitical Volatility: U.S. export controls on semiconductors could slow mid-caps' growth. Monitor Applied Materials' China revenue trends ().
• Execution Risks: Some firms may overpromise on AI adoption timelines. Prioritize those with proven partnerships (e.g., DeepSeek-Alibaba collaborations).
• Valuation Stretch: Avoid chasing momentum—focus on P/E ratios below 15x and EV/Sales under 5x.

Conclusion: The Time to Act is Now

The visits by U.S. investors to China's AI ecosystem are not just curiosity—they're a strategic pivot. Mid-cap firms, long overshadowed by giants and geopolitical noise, now offer a rare blend of undervaluation, innovation, and growth. With Beijing's full-throttle support and global capital sniffing around the edges, this is the moment to build stakes in names like Will Semiconductor and DEEP Robotics. Wait too long, and you'll pay a premium.

The revaluation of China's mid-cap AI sector is underway. Don't miss the boat.