Semiconductor prices break down, optical communications suffer losses; after a rebound due to the narrowing of the tech sector, a second round of adjustment is underway.

Summary of Key Points

On August 24th, the technology sector in the A-share market (especially the STAR Market and the ChiNext) experienced a significant decline, with both the STAR 50 Index and the ChiNext Index falling by more than 3%. Leading AI chip companies (such as Cambricon and Hygon Information) hit new multi-month lows, while leading optical communication companies (such as Zhongji Xuchuang) reversed the gains they made in August but did not break below previous lows. The reasons for the sharp drop include rising U.S. Treasury yields, high valuations of technology stocks, and profit-taking. Even though the mid-year earnings of these companies met expectations, it was not enough to stop the stock prices from falling, as the market's pricing logic has shifted from focusing on earnings to considering a combination of valuation, interest rates, and industry prospects. In the long term, global investment in computing power continues to grow, and the momentum for domestic alternatives is strengthening, indicating that the technology market has not ended, but it will show differentiation—weaker companies will be eliminated, leaving behind those with solid performance and growth potential.

Detailed Analysis

1. The Sharp Drop: The STAR Market and ChiNext Lead the Decline

On August 24th, the technology stocks that suffered the most were those in the STAR Market and the ChiNext (collectively referred to as the "Dual Innovation Boards"). The STAR 50 Index fell by 3.1%, with leading AI chip companies experiencing substantial declines: Cambricon dropped by 6.37% to a new low since April, Hygon Information fell by 6.25%, and Xinyuan Co., Ltd. fell by more than 5% to a new low since January. Leading optical communication companies in the ChiNext, such as Zhongji Xuchuang and New Yisheng, also saw significant declines, but they only reversed the gains they made in August and did not break below July's lows. This suggests that investors have less confidence in the semiconductor sector compared to the optical communication sector, indicating that the adjustment pressures between the two sub-sectors are diverging.

2. Reasons for the Sharp Drop

There are three main reasons for the sudden decline:

• Rising U.S. Treasury Yields: The yields on U.S. government bonds have been increasing recently, making them more attractive investments with lower risk. Investors prefer to buy bonds rather than high-risk technology stocks.
• High Valuations: Although technology stocks have already experienced a period of decline in July, many core technology companies still have valuations that are much higher than those of ordinary stocks. For example, the prices of some AI chip companies already reflect expected growth for several years, and the market now believes they are overpriced.
• Profit-Taking: Many technology stocks rebounded by 40% in the first three weeks of August, and as investors realized the market trend was changing, they sold their positions to lock in profits, exacerbating the decline.

3. Good Earnings, but Still Falling Stock Prices?

The most surprising aspect of the decline is that many leading technology companies had strong mid-year earnings. For instance, Zhongji Xuchuang reported a 241% increase in profits for the first half of the year, and Tianfu Communication saw a 33% increase, both meeting expectations, yet their stock prices still fell. The reason is that the market's view of technology stocks has changed: while good earnings used to be a sufficient reason for price increases, now it is not enough. Investors are now more cautious, questioning whether valuations have exceeded future growth potential and whether macroeconomic factors (such as interest rates) will affect financing costs. Additionally, the August rebound was limited to a small group of high-performing companies, indicating that the market is beginning to select only the most robust entities.

4. No Need to Panic in the Long Term: The Technology Market Has Not Ended, but It Will Be More Selective

Despite the short-term sharp drop, the long-term trend for technology stocks is still positive:

• Growing Global Demand for Computing Power: Cloud providers like Amazon and Google are continuing to invest in computing equipment, and domestic companies such as ByteDance, Alibaba, and Tencent are increasing their AI investments. The demand for computing power will not suddenly disappear.
• Strengthening Domestic Alternatives: While overseas technology spending is affected by high interest rates, domestic markets for computing power, semiconductor equipment, and advanced manufacturing processes are less vulnerable to external disruptions, and the demand for domestic alternatives is increasing.
• Future Opportunities in Core Areas: Dongwu Securities suggests focusing on two types of technology stocks: those in the domestic supply chain (such as domestic chips and equipment) and those with growing demand and capacity (as opposed to those that rely on price hikes for growth).

In summary, this adjustment is not the end of the technology market, but rather a process of weeding out weaker companies and retaining the stronger ones. The long-term trend for technology stocks remains positive, driven by global demand and the strengthening of domestic alternatives.

5. What Should Ordinary Investors Do?

If you hold technology stocks, there's no need to panic, but don't rush to buy them at low prices:

• Assess the quality of your stocks: Be cautious with those in the semiconductor sector that have broken below previous lows; for those in the optical communication sector that have not broken below lows and have good earnings, you can hold on and observe.
• Avoid chasing high-priced stocks that are based on speculative concepts; instead, focus on companies with solid performance and reasonable valuations.
• In the long term, technology will continue to be a key driver of economic growth, and after the adjustment, there may be better buying opportunities once market sentiment stabilizes.

In conclusion, the recent sharp decline in technology stocks is a short-term adjustment, not a reversal of the long-term trend. The key is to select the right companies for investment.