Preface:

With the rapid evolution of new productive forces and the emerging narrative of economic transformation in the post-real estate cycle era, technology enterprises listed on the Hong Kong stock market are poised to play a pivotal role in key consumption and technology manufacturing sectors, promising substantial market returns.

Author | Fang Wensan

Image Source | Network

Tencent and Alibaba Shares Surge to Three-Year Peaks

Following the DeepSeek incident, which wiped out over a trillion dollars in market value of U.S. tech stocks overnight during the Spring Festival, the sentiment of international investors towards Chinese tech stocks has notably shifted.

Since February, Alibaba's Hong Kong shares have surged over 40%, hitting a three-year high.

While Tencent's Hong Kong shares have also witnessed a significant uptick, the increase is less pronounced compared to Alibaba, with shares rising 18% during the same period.

However, Tencent's share price briefly soared to HK$538, marking a new high since July 2021, indicating an upward trajectory.

In a research report released a week ago, Goldman Sachs predicted that in the AI era, "for AI infrastructure, look to Alibaba, and for AI applications, look to Tencent."

Market data has validated the view that Alibaba should be the focal point for AI infrastructure.

Goldman Sachs' latest report highlights that competition in AI applications has evolved from a single-technology comparison to a multi-dimensional "model + scenario + traffic" war.

Since the second half of last year, a trend of cost reduction and efficiency enhancement in large models has emerged. Led by DeepSeek, the depth and breadth of domestic AI applications are anticipated to expand further, driving increased demand for cloud services.

As a leading domestic cloud service provider, Tencent Cloud stands to benefit from market growth, while the new growth potential stemming from WeChat's integration with DeepSeek is highly imaginative.

Bloomberg published an article stating that the DeepSeek incident has spurred traders to buy Chinese tech stocks, with expectations that the Hang Seng Tech Index will climb to its highest point in nearly three years.

Bloomberg's analysis suggests that DeepSeek's rise has attracted market attention to the potential benefits of China's large language model field, subsequently boosting the valuation of undervalued tech stocks.

Currently, the index's forward price-to-earnings ratio stands at 17.4 times, which is relatively low compared to the five-year average of 24.5 times.

From a long-term perspective, Hong Kong tech stocks, exemplified by Alibaba, are indeed undervalued.

Looking back a few years, Alibaba and Tencent consistently ranked among the top ten companies globally in terms of market capitalization.

However, recent rankings are dominated by American tech giants like Apple, NVIDIA, and Tesla.

Prior to this share price surge, Alibaba's share price plummeted from HK$309 to around HK$60.

Despite a recent notable 45% increase to HK$116.7, it is still roughly one-third of its historical high.

Nevertheless, Alibaba's performance has consistently grown over the past few years, in stark contrast to its declining share price, indicating severe market undervaluation.

Thus, Alibaba's dual factors of being undervalued and benefiting from the industrial shift spurred by DeepSeek's low-cost large models have combined to propel its share price to a rapid increase recently.

In terms of gains, Alibaba has led the surge in Hong Kong tech stocks, driving a collective rally in related concept stocks.

Previously, foreign investors' skepticism towards the Hong Kong tech sector centered on the uncertainty of profit growth. However, the visibility of technological strength helps bolster foreign investors' confidence in the Chinese market and prompts them to reassess the value of Chinese tech enterprises.

Investors Snap Up Chinese Tech Stocks in Both Hong Kong and U.S. Markets

Data indicates that during the week ending February 7, China Overseas Internet ETF-KraneShares (KWEB) witnessed a net inflow of funds amounting to US$470 million, setting a new record since October 4, 2024.

The latest documents released by the U.S. Securities and Exchange Commission (SEC) reveal that the hedge fund Appaloosa Management significantly increased its investment in Chinese stocks in the fourth quarter of last year.

In the fourth quarter, the institution boosted its stake in Alibaba from 10 million shares to approximately 11.8 million shares, representing an 18% increase, with holdings valued at 16% of its portfolio, firmly establishing it as Appaloosa's largest position.

Appaloosa also expanded its shareholding in JD.com from 7.3 million shares to approximately 10.5 million shares, marking a more than 43% increase, making JD.com the target with the largest increase in Appaloosa's holdings.

A notable characteristic of this tech stock bull market is that most hyped tech stocks are related to AI.

Once a listed company is associated with the AI concept, it acts as a catalyst for share price appreciation.

Alibaba's share price surge is particularly remarkable, mainly due to its deep collaboration with Apple, which has prompted the market to reassess Alibaba's technological prowess.

As Alibaba transitions from an e-commerce giant to a technology giant, its valuation pricing model has undergone significant changes.

Despite the recent surge, the valuation of core Hong Kong tech stocks has only returned to a reasonable level, still lagging behind the seven major U.S. tech giants.

In essence, this round of gains can be viewed as a catch-up rally aimed at gradually narrowing the valuation gap with U.S. tech stocks.

The valuations of Tencent and Alibaba are expected to gradually align with those of Apple and Microsoft.

Currently, Apple and Microsoft are valued nearly 50% higher than Tencent and Alibaba, and this valuation gap is anticipated to narrow further in the future.

Technology Empowerment and Foreign Capital Inflows Converge in Valuation Adjustment

According to CMB International's analysis, since the release of DeepSeek-R1 at the end of January, the share prices of major Chinese internet companies have risen by an average of 14%, with the forward price-to-earnings ratio expected to increase from 11.6 times to 13 times.

On March 6, the Hong Kong stock market performed robustly, with the Hang Seng Index rebounding strongly above 24,000 points, hitting a three-year high since February 2022, and the Hang Seng Tech Index experiencing a gain of up to 5.4%.

Statistics from ECNS show that since January 14 of this year, the Hang Seng Index and Hang Seng Tech Index have increased by 28.64% and 43%, respectively.

Choice data reveals that the valuation of the Hong Kong stock market has continued to climb recently, with the trailing twelve-month price-to-earnings ratios (TTM) of the Hang Seng Index and Hang Seng Tech Index reaching 10.8 times and 27.75 times, respectively.

Data indicates that in February this year, the cumulative net inflow of southbound funds reached HK$152.8 billion, setting a new high since February 2021 and the second-highest in history, further increasing from the net inflow of HK$125.6 billion in January.

Since the beginning of the Year of the Snake, international and domestic financial institutions have held a positive outlook on Chinese tech stocks.

Recently, Goldman Sachs noted that based on capital flow analysis, the allocation ratio of global hedge funds to Chinese stocks reached 8.2%, a slight increase of about 1% from the previous month, but still lower than the peak of 9.8% in October last year.

Apart from the logical shift driven by industrial narratives, the capital expenditure (CAPEX) cycle will enhance future industrial chain profit expectations, and in the medium term, it is optimistic about the revaluation opportunities of high-quality growth stocks in Hong Kong.

It is noteworthy that in today's significantly adjusted Hong Kong stock market, mainland investors have rushed in to buy at the bottom.

As of the day's close, southbound funds achieved a net purchase of HK$29.6 billion, setting a new record for the highest single-day net purchase.

In the past month, southbound funds have achieved net purchases exceeding HK$10 billion on more than ten trading days.

In its recently released research report, Guosen Securities pointed out that many listed companies in the Hong Kong stock market offer low valuations and high dividends, attracting funds seeking absolute returns.

In the current environment of asset scarcity, these funds have demonstrated a tendency to continuously increase their allocation of dividend assets in Hong Kong stocks.

Moreover, foreign capital has also started paying closer attention to the revaluation of Chinese asset values, which could reignite long-term investments in Hong Kong stocks, thereby maintaining the activity of Hong Kong stock trading.

According to FactSet data, foreign capital accounts for over 65% of the top 100 weighted stocks in the MSCI China Index, and foreign investors typically demand higher risk compensation based on the "country premium," which has long inhibited the valuation of Hong Kong stocks.

Recently, the significant inflow of southbound funds, with cumulative purchases reaching HK$313.9 billion from January 1, 2025, to March 10, is more than five times that of the same period last year, and the proportion of southbound trading has remained at about 30%.

Comprehensive market views suggest that this round of rebound in Hong Kong stocks is primarily attributed to the revaluation of Chinese asset values.

In recent research reports, multiple institutions have consistently emphasized the investment potential of the Hang Seng Tech Index in valuation adjustment.

Goldman Sachs' research report highlights that the launch of DeepSeek R1 showcases the capability of Chinese tech companies to develop AI models with global competitiveness, while also sparking investor concerns about the return on investment related to Western AI.

In terms of valuation, more optimistic growth prospects and potential productivity enhancements driven by technological breakthroughs are expected to help narrow the valuation gap between leading tech/semiconductor stocks in the United States and China.

While accurately predicting the potential valuation increase is challenging, if the price-to-earnings ratio of Chinese tech stocks can approach the level of American tech companies, it suggests that the former's valuation may rise by 20%, particularly in the software sector, while the overall market valuation may increase by 7%.

Amidst slowing economic growth, the upcoming earnings season will serve as a reliable indicator of revenue and profit trends.

Conclusion

Considering various factors, under the current stable macroeconomic and industrial environment, the Hang Seng Tech Index may face adjustment pressure in the short term.

Particularly after significant gains, market sentiments regarding the sustainability of the tech growth trend vary, which could trigger market adjustments.

However, from a long-term perspective, as long as there are no fundamental changes in the macroeconomic environment, the market is expected to continue exhibiting a rebound trend.

The greatest uncertainty in market trends, or the factor that may lead to a turning point, could be the competitive landscape between major international powers.