After leading global markets at the start of the year and being hailed by foreign institutions as the bellwether of a potential Chinese asset revaluation, the Hang Seng Tech Index has spent over a month in retreat, dropping nearly 18% between March 10 and April 15.
In contrast, after the Lunar New Year, US markets took a hit: the Nasdaq Index fell more than 11% between February 5 and March 10, while the Russell 3000 Index dropped nearly 8%. Over the same period, Hong Kong stocks stood out. The Hang Seng Index rose over 14%, and the Hang Seng Tech Index surged more than 18%.
This rally, driven by breakthroughs in artificial intelligence, was widely attributed to the emergence of DeepSeek, which many saw as a major step toward breaking the US monopoly on AI technologies. As the competition moves from infrastructure to applications, market consensus is that Chinese companies are well positioned to gain the upper hand.
But zooming out, even at its 2024 peak, the Hang Seng Tech Index remained historically undervalued, with most stocks trading at 20–25 times earnings. As of April 15, Alibaba had a price-to-earnings (PE) ratio of 16.2, Tencent sat at 20, BYD at 27.2, and Meituan at 23.2. Only Xiaomi at 43.7 and Semiconductor Manufacturing International Corporation (SMIC) at 94.7 traded significantly above the index average.
By comparison, the Nasdaq Composite was trading at around 37.0 times earnings. Among the so-called “Magnificent Seven” of US tech, Amazon had a PE ratio of 32.6, Apple at 31.6, Nvidia at 37.1, and Tesla at a lofty 114.
So, is this downturn in Hong Kong tech stocks a signal that the rally is over, or just a short-term correction? When might China’s tech giants see a reevaluation of their market value? And can they ever reach the valuation levels of their US peers?
36Kr spoke with Yao Wei, fund manager at Zhonghai Fund Management, for his views.
The following transcript has been edited and consolidated for brevity and clarity.
36Kr: Since the start of the year, the Hang Seng Tech Index has climbed rapidly but began pulling back at the end of February. How do you see the AI rally triggered by DeepSeek playing out from here?
Yao Wei (YW): I think tech stocks may continue to trend upward, albeit with volatility. DeepSeek sparked a broad rally, but we could now see some divergence: stocks that surged earlier may consolidate, while laggards may catch up. Beyond that, everything depends on fundamentals. If earnings continue to outperform, then even the earlier leaders may rally again.
36Kr: In the context of AI, how should we evaluate the fundamentals of tech companies?
YW: The key is earnings. For internet companies, revenue typically comes from e-commerce, cloud services, and so on. If AI really helps drive growth in metrics like e-commerce membership, gross merchandise value (GMV), or cloud revenue, we should see that reflected in earnings—and eventually, in share prices.
36Kr: What’s your take on the current value proposition of the Hang Seng Tech Index?
YW: While the index has seen a sizable pullback in the past month, I remain optimistic. Many of its constituents are deeply embedded in AI application scenarios. Last year, the focus was on computing power. Now, I believe applications are gaining momentum.
The index includes companies across gaming, advertising, healthcare, automotive, and home appliances—all areas where AI has tangible applications. If AI starts driving real product-level improvements and revenue gains, this index offers a strong way to gain exposure.
36Kr: For investors returning to the market, what opportunities stand out in Hong Kong equities?
YW: I’d divide them into two major categories: those driven by industrial transformation—like tech stocks—and those tied to the economic cycle. Tech stocks have seen steep short-term gains, but if AI spurs sustained demand, there’s room for further upside.
For cyclical stocks, everything hinges on macroeconomic conditions. If China’s economy shows real signs of recovery, cyclical sectors could offer strong returns as well.
36Kr: Under the broader thesis of a tech bull market, when do you think the valuation reset for leading technology companies might happen? How long might it last? Could Chinese tech ever reach the valuation levels of their Nasdaq peers?
YW: In recent years, most internet companies in the Hong Kong market were undervalued, largely due to policy risk. Gaming companies, for instance, were hit hard by the freeze on game approvals. Now that the regulatory climate is normalizing, we’ve seen some turning points in revenue growth. This shift changes market expectations and could support higher valuations.
As the Hang Seng Tech Index continues to rise, I expect internal sector rotation. High-flying stocks may pull back, while undervalued ones may rise. The timing of that rebound often aligns with earnings season. If a company beats expectations, its stock may rally quickly. But duration and upside potential vary by company and depend on sustained earnings growth. If that’s in place, Hong Kong’s valuation tolerance can absolutely match that of other markets.
36Kr: Besides earnings reports, what other data should investors track to assess fundamentals?
YW: Watch for high-frequency indicators tracked by analysts and institutions, such as daily and monthly active users for e-commerce and cloud platforms. For gaming companies using AI to upgrade user experience, look at changes in membership or revenue. These metrics can be powerful catalysts for valuation shifts.
36Kr: Beyond policy recovery and better fundamentals, what else could signal a meaningful valuation shift for Chinese tech?
YW: AI applications are another key driver. They truly enhance product experiences at many internet firms, and eventually, that gets priced into earnings. It takes time, but the impact is real.
On the capital side, southbound investment flows have already shown confidence. From January to March, more than HKD 430 billion (USD 55.4 billion) flowed into Hong Kong stocks, representing over half of 2023’s full-year total. Why? It’s partly because internet stocks like these aren’t available in China’s A-share market. Plus, Hong Kong listings are trading at a noticeable discount relative to their A-share counterparts, which adds appeal.
36Kr: Short-term foreign capital has returned, but long-term investors remain cautious. What conditions could prompt them to increase their exposure?
YW: Long-term investors pay close attention to macro fundamentals. They’ll wait until they see a clear improvement. Geopolitics is also a big factor—stability there is essential before major institutional funds return.
So far, most of the inbound capital this year is from hedge funds. That’s because cyclical plays still dominate, and macro conditions haven’t fully turned around. But macro trends impact both corporate earnings and exchange rates. If the economy improves, we might see the Chinese yuan appreciate—and that would boost sentiment.
36Kr: Some DeepSeek-related stocks are diverging in performance. Deep tech and AI-driven internet firms are leading the charge, while consumer-facing platforms lag behind. Is this a sign of growing divergence in investor confidence?
YW: Yes—there’s growing divergence. Stocks linked to deep tech and AI naturally lead in an AI-driven rally. Consumer-facing firms, on the other hand, are more exposed to consumption trends, which remain weak.
36Kr: For everyday investors, how can they tell which AI-related companies have real potential, and which are just hype?
YW: Look at whether AI is actually generating demand and what share of revenue that demand represents. If it’s marginal, it may just be speculative hype. If it’s substantial, then it’s likely real.
36Kr: In 2025, what will be the key focus for tech investing? How should investors structure their portfolios?
YW: AI demand will be the main theme. We’re focused on two tracks:
- Infrastructure and foundation models, such as AI chips, compute hardware, and large model providers.
- Applications, comprising both hardware (phones, glasses, cars, robots) and software and services (education, healthcare, marketing, e-commerce, law, gaming).
36Kr: Beyond earnings season, what other events or data points should tech investors watch for this year?
YW: Keep an eye on progress in AI: the development of large models globally, revenue share from AI for major firms, capex trends, and the rollout of new hardware.
On geopolitics, the US “reciprocal tariffs” took effect April 3. But the long-term impact—and which sectors will be hit hardest—remains unclear. There’s a lot of gamesmanship in play.
As for the US Federal Reserve, everything hinges on how dovish it gets. Rate cut expectations are mixed because of volatile inflation and jobs data. There’s even concern that tariffs could worsen inflation. So whether the Fed cuts once or twice this year remains uncertain—I lean cautious.
But rates are still high. If they drop, that could boost the Hang Seng Tech Index, since capital is global. Lower rates tend to chase higher returns, and that could help Hong Kong tech.
This article was written by Wang Hanyu and originally published on 36Kr.
