Source: CMB Strategy Research. Recently, there has been sudden investor attention on the concept of 'Kote estimate'. The valuation methodology of technology stocks has similarities and differences with general stocks. According to the different stages of technology penetration, it can be divided into cash flow technology stocks, cyclical technology stocks, and track technology stocks. Different technology stocks have different valuation methods: cash flow technology stocks usually use valuation indicators such as (P/OCF, P/FCF), which are greatly influenced by risk-free interest rates. Cyclical technology is usually valued from the perspective of PEG, which is greatly affected by the trend of its own industry prosperity. Track technology usually uses the Future Market Value Discount (FMvD) model for valuation. It is mainly influenced by factors such as the probability of industry penetration to a certain level, realized deadline, and future market size, and is also influenced by risk-free interest rates. Currently, if the Fed gradually enters the interest rate cut cycle, the Hang Seng Internet and Hang Seng Technologies in Hong Kong may see a valuation increase. Currently, consumer electronics and semiconductor prosperity are on the rise, and the corresponding valuations are expected to rise, while the highly expected track technology stocks are AI and humanoid robots, which are currently waiting patiently for technological progress and breakthrough. Of course, if the valuation of core symbols related to AI development of representative global companies develops faster, once domestic technology makes a breakthrough, there will be even greater room for valuation increase in the field of AI.

Recently, there has been sudden investor attention on the concept of 'Kote estimate'. The valuation methodology of technology stocks has similarities and differences with general stocks. Different types of technology stocks have different characteristics and valuations methods. According to different stages of penetration rate and growth potential, technology stocks can be divided into three types: cash flow technology stocks, cyclical technology stocks, and track technology stocks, and each type has different conditions for valuation improvement.

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Currently, if the Fed gradually enters the interest rate cut cycle, the Hang Seng Internet and Hang Seng Technologies in Hong Kong may see a valuation increase. Currently, consumer electronics and semiconductor prosperity are on the rise, and the corresponding valuations are expected to rise, while the highly expected track technology stocks are AI and humanoid robots, which are currently waiting patiently for technological progress and breakthrough. Of course, if the valuation of core symbols related to AI development of representative global companies develops faster, once domestic technology makes a breakthrough, there will be even greater room for valuation increase in the field of AI.

"How to evaluate 'Kote stocks'?"

Recently, there has been sudden investor attention on the concept of 'Kote estimate'. Due to its certain growth attributes, technology stocks have a special fixed valuation method. Different types of technology stocks have different characteristics and valuation methods. According to different stages of penetration rate and growth potential, technology stocks can be divided into three types: cash flow technology stocks, cyclical technology stocks, and track technology stocks, and each type has different conditions for valuation improvement.

Cash flow technology stocks:

Applicable types: Technology stocks that have undergone a large amount of investment in the early stage and have a stable competition pattern and have entered a kind of licensing fee mode.

Valuation model: P/OCF (price-to-operating cash flow ratio) or P/FCF (price-to-free cash flow ratio).

Valuation improvement conditions:

1. Market interest rates decline:

When market interest rates decline, the present value of cash flow will increase. The specific reason is that interest rates are the key factor in cash flow discount. Lower interest rates make future cash flows more valuable when discounted, thereby increasing the company's valuation. A low interest rate environment usually encourages investors to invest in companies with high cash flow output, because the opportunity cost of funds has decreased.

2. An increase in the proportion of cash flow:

As the company's business model matures, the proportion of accounts receivable and prepaid items increases, which increases the cash flow level. When the company transitions from a growth stage to a stable period, the reduction of capital expenditure and the improvement of operating efficiency will further increase the proportion of free cash flow. Higher free cash flow enhances the company's ability to reinvest and return to shareholders, enhances the market's confidence in the company, and improves its valuation.

Typical representatives: SaaS (software as a service) and Internet companies.

Characteristics: These companies usually have a stable subscription revenue model, high customer stickiness, and stable cash flow. Due to the predictability of its business model, SaaS companies perform relatively stably in market fluctuations.

The operation of cash flow technology stocks is relatively stable, and the expansion of their valuation relies on the decline of market interest rates. The Hang Seng Internet Index represents the market valuation fluctuation of this type of stocks. The largest variable affecting Hang Seng's valuation history is Hong Kong's market interest rate, and because the Hong Kong dollar is pegged to the US dollar, Hong Kong's interest rate level and the trend of the Federal Reserve are basically the same. Therefore, if the valuation of indices similar to the Hang Seng Internet wants to achieve a significant increase, the Federal Reserve needs to gradually enter an interest rate cut cycle, and market interest rates need to decline significantly. In the past few years, typical domestic cash flow technology stocks have been communication operators. During the process of drastic decline in interest rates in the past two years, their valuations achieved a large proportion of increase.

In the past few years, typical domestic cash flow technology stocks have been communication operators. During the process of drastic decline in interest rates in the past two years, their valuations achieved a large proportion of increase.

Cyclical technology stocks:

Applicable types: Technology stocks with high industry penetration rates and strong cyclicality.

Valuation Model: PEG (Price-to-Earnings Growth Ratio).

Among them, PEG: considering the company's profit growth rate. In practical investment, when using this formula, we tend to choose PEG ≤1, and implicitly assume that PEG has a small fluctuation range.

g: future 1-3 year growth rate or compound growth rate.

E: current earnings.

gs: The most important factor in this model, future 1-3 years of earnings growth rate or compound growth rate.

This model has little to do with interest rates and is closely related to the magnitude and slope of profit recovery.

Valuation enhancement conditions:

1. Performance cyclically rebounds:

The performance of cyclical technology companies is greatly affected by industry cycles. When the industry enters an upward cycle, product demand increases, and the company's revenue and profit will also rebound, pushing down the PEG ratio. At this time, the growth potential of technology companies is re-evaluated by the market, resulting in valuation enhancement. Understanding and grasping the bottom and turning points of the industry cycle is the key to investing in cyclical technology stocks.

2. Driven by technological innovation:

If cyclical technology companies can gain a leading position in the market competition through technological innovation or product upgrades, their valuation can also be significantly increased. The adoption and breakthrough of new technologies can open up new growth space for the company and enhance market confidence. For example, companies specializing in light modules have experienced rapid valuation expansion in the era of AI computing power.

Typical representatives: mature process semiconductors, consumer electronics, electric vehicles, etc.

Characteristics: These companies are usually in a stage where the industry penetration rate is relatively high, and market demand has periodic fluctuations. Investors need to pay attention to changes in industry cycles to seize investment opportunities.

Cyclical technology stocks, their own industry growth rate is affected by economic and product cycles, and indicators such as product sales show characteristics of volatility. The direction of valuation operation is basically consistent with the direction of industry prosperity. Taking consumer electronics as an example, after 2012, its valuation fluctuations were basically in line with the direction of domestic mobile phone sales.

In addition, industries such as mature process semiconductors, electric vehicles, and photovoltaics gradually shift from race-type technology stocks to cyclical technology stocks after the penetration rate reaches a certain level, and are more affected by their own industry prosperity cycles.

From the latest sales data, consumer electronics and semiconductors are showing an accelerating trend of prosperity, which is conducive to the re-evaluation of this type of technology stocks.

Race-type technology stocks.

Suitable types: technology stocks with industry penetration rate of less than 10%, and with the potential to accelerate penetration rate with technological progress.

Valuation Model: FMvD (Future Market Value Discount Model).

Valuation enhancement conditions:

1. Accelerated penetration rate:

Technology stocks are in the early stages of development and the market is not yet saturated. When the market penetration rate reaches a critical point or a technological breakthrough, the industry demand will explode. The market's expectation of increased penetration will enhance investor confidence and push valuations up significantly.

2. Probability of increased penetration rate:

Factors such as technological progress, policy support, and market education can increase the probability of industry penetration rate improvement. When the expected increase in the penetration rate of the industry becomes more certain, investors will reassess the company's future growth potential, driving valuations up.

3. Increasing future market space:

The potential market space for industry development is an important factor in the valuation of race-type technology stocks. As market demand grows and application scenarios expand, future market space will increase. This means that the ceiling for the company's business growth is higher, the growth potential is greater, and its valuation is thereby increased.

Typical Representatives: AI hardware and humanoid robot companies.

Characteristics: These companies are usually in the early stages of industry development, with broad technological prospects but immature business models. Investors have high expectations for their future growth but also need to take on relatively high risks.

Currently, AI, humanoid robots, and low-altitude economies have low penetration rates, large spaces, and a high probability of accelerated penetration rate. However, compared to industries such as electric vehicles, 5G, and CXO, which are relatively easy to calculate future market space, the market space of AI, humanoid robots, and low-altitude economies is large and has a trend of becoming even bigger with technological development. Therefore, only when the probability of accelerating the penetration rate of Chinese companies increases significantly, can the valuation of AI, humanoid robots, and low-altitude economies be significantly improved. If the valuation of such technology stocks is to be increased, we can only expect technological breakthroughs.

Another methodology is to benchmark market value, which means that when our domestic technology previously lagged behind the world's most advanced level, the market value of companies with world-class technologies can be used as a reference for the market value of domestic companies after technological breakthroughs.

Taking the AI industry as an example, the current market value of the core US companies in the AI chip segment, Applied Materials, TSMC, NVIDIA, Google, and Microsoft (AN ATM), has reached nearly 9.8 trillion US dollars, or nearly 72 trillion RMB, which is roughly equivalent to the total market value of A shares (77 trillion RMB).

Correspondingly, once domestic AI chip technology can make a breakthrough, the AI industry will also develop vigorously in China like in the US, and the valuation of leading companies will increase correspondingly. Currently, the corresponding representative companies in A shares and Hong Kong shares, such as Baidu, Hikvision, SMIC, Alibaba, and Kingsoft Office, have a market value of US$311.8 billion, accounting for only 3.2% of the market value of US stocks. Once domestic AI chip technology makes a breakthrough, the market size of AI that depends on this technology can expand rapidly, and the market penetration rate of AI can be accelerated. Then A-share and Hong Kong stock market values ​​are expected to narrow the gap with the US stock market values, and there is still a lot of room for valuation increase.

Summary

Recently, the concept of "Science and Technology Assessed" has suddenly attracted the attention of investors. The valuation methodology of technology stocks is similar to that of general stocks, but also different. According to the different stages of technology penetration rate, they can be divided into cash flow technology stocks, cyclical technology stocks, and race-type technology stocks. Different technology stocks have different valuation methods: cash flow-type technology stocks usually use valuation indicators such as (P/OCF, P/FCF), which are greatly influenced by risk-free interest rates.

Cyclical technology usually uses the PEG valuation perspective, which is greatly influenced by its own industry trend. Race-type technology usually uses the Future Market Value Discounted (FMvD) model for valuation, which is influenced by comprehensive factors such as the probability of achieving a certain level of industry penetration rate, the year of realization, and the future market scale, as well as the risk-free interest rate.

Currently, with the US Federal Reserve gradually entering a rate cut cycle, Hong Kong's H-share Internet and H-share technology stocks are expected to see a valuation increase; currently, the prosperity of consumer electronics and semiconductors is rising, and the corresponding valuations are expected to rise, while AI and humanoid robots are the race-type technology stocks with high expectations, and are currently waiting patiently for technological progress and breakthroughs. Of course, if the market value of global representative companies that develop AI faster is used as a reference, once domestic technology makes a breakthrough, the space for the valuation of core targets in the AI field will be even greater.

Editor/tolk