The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, June 29 (Reuters Breakingviews) - AI chips are running perilously hot. China's Kunlunxin is targeting a valuation of $50 billion in its upcoming Hong Kong IPO, The Information reported, citing sources. That's up 17 times in just six months or so as semiconductor shortages continue, accounting for most of majority owner Baidu's market capitalisation. Sure, by one metric it would trade at a similar multiple to listed rivals. But the speed and disconnect highlight how the markets are turning frothy.

Founded as search engine-operator Baidu's in-house silicon unit in 2011, Kunlunxin - named after a sacred mountain range often featured in ancient Chinese folklore and kung-fu tales - is one of the country's most promising Nvidia NVDA.O challengers. Booming demand, Washington's export controls and Beijing's preference for homegrown alternatives mean domestic chipmakers now hold 41% of the so-called AI accelerator server market in the People's Republic, according to data provider IDC, referring to the specialised hardware used to train or run AI models.

Kunlunxin is a minnow against Nvidia and larger domestic rivals like Huawei and Alibaba's 9988.HK chipmaking arm. But 58%-owner Baidu does not compete directly with many internet companies, unlike the $228 billion e-commerce empire that spans online videos, food delivery and more. That may explain why Alibaba nemesis Tencent 0700.HK is already a customer and TikTok-parent ByteDance is mulling a big purchase, per Reuters. The $34 billion Baidu, which boasts a robotaxi business and other AI applications, is also a top user of Kunlunxin kit.

Analysts at Citi forecast Kunlunxin revenue will hit 14 billion yuan, roughly $2 billion, in 2027, more than triple last year's top line. At 25 times sales, that implies a similarly punchy valuation multiple as Shanghai-listed Cambricon Technologies and Shanghai Iluvatar CoreX Semiconductor, whose shares trade in Hong Kong.

Still, a $50 billion target is an astonishing acceleration from the $3 billion valuation in last December's funding round. Moreover, it implies that Baidu's stake is worth over 80% of its market capitalisation as of Friday's close - a bizarre market disconnect between AI exuberance and the search-engine operator's languishing stock, down 20% this year in Hong Kong and New York. That Kunlunxin is "prioritising" potential investors that buy its semiconductors in the share offering, per The Information, is a sign of hubris too.

Already, global warnings of excess are rising. Just this weekend, the Bank for International Settlements flagged risks that the AI capex boom could turn into a "protracted investment bust." Chinese markets are hardly immune.

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CONTEXT NEWS

Baidu's AI chip unit, Kunlunxin, is planning to go public in Hong Kong at a $50 billion valuation, The Information reported on June 28, citing sources familiar with the matter.

The chipmaker, 58% owned by Baidu, was valued at 21 billion yuan ($3.1 billion) in a December fundraising, Reuters reported at the time, citing sources.