Equity Strategy China China AI from localization to monetization

Equity Strategy - China China AI: from localization to monetization

From technology catch-up to ecosystem competition 17 September 2026

China’s AI localization is moving from policy ambition to commercial reality. Domestic Equity Strategy capabilities and adoption are advancing despite gaps in leading-edge hardware, while China improvements in model efficiency and system optimization could support commercial Winnie Wu >> viability before full technological self-sufficiency. Competition is increasingly shifting Research Analyst from technology catch-up to ecosystem scale and monetization. Technology progress Merrill Lynch (Hong Kong) and high-profile listings are broadening China’s investable AI universe, offering diverse opportunities across localization, global supply chains and applications. Daley Li, CFA >> Research Analyst Localization: gaining shares and closing gaps Merrill Lynch (Hong Kong) China continues to make progress toward technology self-sufficiency, albeit unevenly Alex Liu >> across segments. In AI accelerators, domestic vendors’ revenue market share rose to Research Analyst Merrill Lynch (Hong Kong) nearly 50% in 2025 and could approach 80% by 2028E, with Huawei leading in training capabilities and other local players gaining traction in inference. In memory, CXMT’s Ming Hsun Lee, CFA >> global DRAM share rose from 3-4% in 2024 to 10% in 2Q26, while YMTC’s NAND share Research Analyst Merrill Lynch (Hong Kong) increased from 7-8% to 14%. CXMT remains several years behind global leaders, while YMTC is closer to the NAND frontier. In semi equipment, domestic suppliers’ market Dai Shen >> share reached nearly 30% in 2025, up from 22% in 2019, though significant gaps remain Research Analyst Merrill Lynch (Hong Kong) in lithography, ion implantation, and metrology/inspection. Meanwhile, Chinese open- weight LLMs are narrowing the capability gap with leading proprietary models. Joyce Ju >> Research Analyst Monetization: the AI value chain smile curve Merrill Lynch (Hong Kong) We see China’s AI stack evolving into a barbell profit structure, with the strongest Harry Zhuang >> economics concentrated at both ends of the value chain: strategic hardware bottlenecks Research Analyst such as AI accelerators, semi equipment, foundries, and memory benefit from high entry Merrill Lynch (Hong Kong) barriers and capital intensity, while cloud service providers and large AI platforms enjoy Summer Wang, CFA >> scale advantages, rich use case, and cross-selling opportunities. By contrast, standalone Research Analyst LLM labs and physical AI manufacturers face lower switching costs and more intense Merrill Lynch (Hong Kong) competition, limiting pricing power and profitability. Joanna Du >> Research Analyst China AI stocks: three different themes to play Merrill Lynch (Hong Kong) We group China AI-related stocks into three buckets with distinct risk-reward profiles. 1) Chris Oberoi >> China AI localization beneficiaries are aligned with policy priorities and offer Head of APAC Research diversification from the US AI cycle, but are well owned and richly valued. 2) AI Merrill Lynch (Hong Kong) infrastructure exporters are proven winners from global AI buildouts, though they are highly exposed to the US spending cycle with emerging sanction risks. 3) AI application Patrick Pan, CFA >> Strategist names represent the ultimate monetization layer with long-term potential, but face Merrill Lynch (Hong Kong) near-term challenges from intense competition and the lack of a clear killer APP. If US AI CAPEX slows, exporters would likely face the greatest earnings and valuation pressure, Gina Wu >> localization plays could see multiple compression but create buy-the-dip opportunities, Strategist Merrill Lynch (Hong Kong) while selected deep-value application names may be more defensive.

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