BYD, CATL, Midea lead 5 China recovery plays as index slides 11%

Chinese stocks are down 11% this year, but a handful of companies tied to AI infrastructure, energy security, and industrial automation are drawing fund managers back to a market trading at half its 2020 valuation.

China's MSCI index has fallen 11% year-to-date to about 12 times forward earnings, roughly half its 2020 valuation, as weak consumer spending and US trade restrictions keep investors on the sidelines.

"There's value. It's probably a good time to think about it," said Alison Shimada, head of Total Emerging Markets Equity at Allspring Global Investments.

Retail sales turned negative in May for the first time since December 2022, and bank loan growth fell to 5.5% year-over-year, its lowest since 2001. Meanwhile, South Korea and Taiwan have surged 122% and 73% respectively on the AI chip boom, pushing China from 40% of the MSCI Emerging Markets index in 2020 to 20% today — now ranked third behind both markets.

Fund managers are bypassing internet giants Alibaba and Tencent in favor of companies tied to Beijing's self-reliance push and AI infrastructure buildout, including BYD, CATL, Zhongji Innolight, Midea, and Montage Technology — names that trade at single-digit to low-teens earnings multiples despite exposure to China's fastest-growing industrial segments.

AI and Energy Security Drive Demand

China's push for self-reliance in semiconductors and AI hardware is creating opportunities beyond the well-known tech names. Vivian Lin Thurston, manager of the William Blair Emerging Markets Growth fund, described China as "the only country in the world that has the entire AI ecosystem from beginning to end" after returning from a visit. Optical networking company Zhongji Innolight and chip designer Montage Technology — which sells to Samsung Electronics and SK Hynix — are among the beneficiaries. Ben Durrant, a manager at Baillie Gifford's new Emerging Markets ETF, said Montage could grow into a company as large as Broadcom over the next decade.

Energy security is another structural driver. China's success in diversifying into renewables, nuclear, and coal helped it weather the Iran war better than South Korea and other nations more dependent on Middle East oil, said Rohit Chopra, manager of the Lazard Emerging Markets Equity fund. That push should sustain demand for CATL and BYD, both of which he owns.

BYD's Industrial Battery Business Offers Hidden Value

BYD stock has fallen 36% since May 2025 as domestic price wars squeezed its EV margins. Yet the company has become the best-selling global EV brand through lower-cost, high-range models, with roughly half of sales now coming from overseas. A factory under construction in Hungary will allow tariff-free sales into Europe.

Chopra said investors may be underestimating BYD's industrial-scale battery systems business, which is generating strong demand from the AI data center buildout. That segment could eventually account for a third of overall revenue, up from an estimated 5% today. At 13 times estimated 2027 profits, BYD trades at a discount to most global automakers.

Midea, best known for home appliances, now generates a quarter of sales from robotics, factory automation, and data-center cooling. Durrant called the stock a "cheap rarity" at 12 times earnings, delivering free cash flow compounding at 10% annually with a 4% dividend yield.

Risks Remain Despite Compelling Valuations

Geopolitical headwinds persist. The US Defense Department recently blacklisted dozens of Chinese companies including Alibaba, Baidu, and BYD, barring them from doing business with the US military — a largely symbolic move that nonetheless prompted Beijing to retaliate with trade restrictions on US rare earth producers. Domestic competition remains fierce, and Beijing has increased scrutiny of its private-fund industry to rein in IPO hype in Hong Kong.

Still, Nicholas Borst, director of China research at Seafarer Funds, said companies he met with on a recent trip were the most relaxed he had ever seen about government policy. "Market regulators are doing some things on competition and there are policies where national security is an imperative, like AI and financial stability. But in general the feel was for a loosening and more relaxed policy environment," Borst said.

For investors willing to look past the macro headwinds, China's A-share market offers exposure to AI and industrial megatrends at valuations that are hard to find elsewhere. ETFs such as the Xtrackers Harvest CSI 300 China A-Shares ETF and the Rayliant-ChinaAMC Transformative China Tech ETF provide access to these themes without the complexity of buying individual mainland-listed stocks.

This article is for informational purposes only and does not constitute investment advice.