Global Semiconductors (Fabless): DeepSeek Impact – Will Guzzlers Turn Into Nibblers?
DeepSeek is accelerating the AI race and adoption. The emergence of DeepSeek will prompt the success of smaller AI models, shifting the demand towards lower-cost chips in two to three years. Meanwhil...
Chief Investment Office - Hong Kong version19 Feb 2025
  • The emergence of DeepSeek will accelerate the adoption of AI-enabled devices and increase demand for computing power.
  • Lower-cost, open-source AI models will be key in empowering businesses to develop customised models.
  • China is set to see a surge in demand for computing power and AI-enabled devices, with promising prospects for data centres and smartphone brands.
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DeepSeek is accelerating the AI race and adoption. The emergence of DeepSeek will prompt the success of smaller AI models, shifting the demand towards lower-cost chips in two to three years. Meanwhile, demand for computing power will rise much faster in China, benefitting data centres and cloud providers.

A game changer and threat to high-end chips? DeepSeek represents a significant advancement in the already rapid growth of computing efficiency (4x-10x annually).  Going forward, lower-cost, open-source AI models, even those with initial limited capabilities, are likely to empower businesses in developing customised models. This could challenge the dominance of higher-cost, closed-source models over time. While street has not changed Nvidia’s FY26F (Jan YE) projections due to its existing solid order book, its longer-term demand projections could be under pressure as smaller AI models shift the demand towards its lower-end H100 chips and potentially reduce the demand or pricing for its cutting-edge Blackwell chips.

Proprietary chips are likely to chip away at Nvidia’s shares in the longer-term.  A big increase in capex by US hyperscalers in 2025, focusing on inferencing with their proprietary chips, also supports this shift. Fit-for-purpose custom AI chips that yield far more efficient outcomes are viable alternatives to Nvidia GPUs.

Beneficiaries of wider adoption of AI. Microsoft projects that the rising needs for AI may result in an even higher demand for computing power as per Jevon’s Paradox. Against this backdrop, we believe that computer demand would rise rapidly in China due to a lower reliance on high-end chips. We see further rerating for (i) data centre players GDS who are trading far below US data centre peers trading at 23-24 EV/EBITDA, despite offering higher growth, (ii) Alibaba whose cloud business will benefit from rising popularity of its AI model, and (iii) Xiaomi which will benefit from a rising sale of premium AI-smartphones that are integrated with advanced LLM such as DeepSeek.

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