CATL and STAR 50 Stocks Face Margin Squeeze as AI Profit Doubts Mount

The STAR 50 Index has dropped more than 40% from its peak in July, marking a sharp reversal for China’s technology sector. This decline reflects growing investor unease over whether the country’s artificial intelligence boom can generate profits large enough to justify current valuations. The index tracks the 50 largest and most liquid companies on Shanghai’s STAR Market, a hub for semiconductor and AI firms.

Benjamin Cavender of China Market Research Group stated that the sell-off initially began as a valuation correction and profit taking. He noted that the market is now subject to a critical examination of whether earnings can support the excitement around AI. This shift follows a rally that gained momentum after DeepSeek emerged in early 2025, which had raised hopes that domestic firms could rival U.S. counterparts. That optimism has faded as investors question how quickly heavy AI spending translates into profit.

Battery maker CATL illustrates this profitability squeeze. Although the company reported roughly 59% revenue growth in the third quarter, net profit rose only about 15%. Cavender identified the gap between growth and profitability as CATL’s core problem. He added that competition, shifting product mix, and changes to taxes and rebates are eroding margins despite the firm’s dominant global position in electric vehicles and energy storage. Vey-Sern Ling of Union Bancaire Privée warned that lower unit profitability could weigh on near-term earnings even as CATL maintains its global lead.

The pressure extends beyond technology to the broader economy. China’s long property downturn has hurt household confidence, and weak consumption continues to affect the advertising and e-commerce businesses of major internet platforms. Ling observed that Chinese tech stock valuations have reached multi-year lows, which should limit downside, though upside catalysts remain elusive. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said investors want to see how big tech groups convert spending into earnings. He noted that several AI initial public offerings drew strong early demand before enthusiasm cooled.

Market exposure varies by listing location. Brendan Ahern, chief investment officer at KraneShares, noted that companies on Shanghai’s STAR Board are benefiting from semiconductor spending by Chinese and American tech giants. In contrast, Hong Kong-listed stocks are more exposed to sluggish domestic consumption due to their heavier weighting in consumer-facing internet platforms.

Hui described the property downturn as a fundamental obstacle, with households increasingly keeping savings in cash rather than equities. He sees limited downside for broader Chinese benchmarks, pointing to relatively undemanding valuations and light positioning among international investors. Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, suggested that a recovery in American technology shares could support Chinese stocks. Cavender cautioned that cheaper valuations alone may not suffice, stating that a lasting rebound would need stabilizing earnings, clearer returns on AI spending, and stronger domestic demand.