EJFQ Market Analysis | Japan and South Korea's surge may lead to capital outflows, Mainland tech companies continue to drive speculation

On the eve of the “Xi-Trump Meeting,” Wall Street stocks hit new highs again on Wednesday (13th), largely due to Cisco’s latest operating revenue and earnings guidance exceeding expectations, confirming strong global demand for artificial intelligence (AI) infrastructure. The investment sentiment is lively, reflected in the NASDAQ Golden Dragon Index, which also surged 3.89%, recovering losses since the Middle East conflict in late February.

Although the Nikkei 225 Index and South Korea’s KOSPI Index continued to rise yesterday, reaching new highs in both Japan and South Korea at the close, Japanese stocks ended lower, with valuation concerns (price-to-earnings ratio reaching 25.91) seemingly causing selling pressure; South Korean stocks also stalled just before crossing 8,000 points, possibly due to government plans to levy “citizen dividends” on AI industry profits and the significant gains, with reports indicating overseas investors have net sold $11.5 billion of Korean stocks since May (potentially the third-largest “capital outflow month” ever).

Both major Asian stock markets have their “hidden risks.” If capital seeks alternatives, Hong Kong stocks may fill this gap. First, the offshore RMB yesterday reached 6.7855 against the US dollar, the strongest in over three years, with the People’s Bank of China guiding the midpoint higher, signaling strong confidence in the macroeconomy. In fact, after inflation heated up in April, exports benefited from global AI infrastructure demand, recording double-digit growth, which also benefits the RMB and indirectly enhances the attractiveness of Chinese assets priced in Hong Kong dollars.

Second, Hong Kong’s “tech giants” delivered their performance reports on Wednesday. Regarding AI development, Alibaba (09988) reported quarterly revenue of 35.8 billion RMB for this segment as of the end of March, maintaining rapid growth multiples, with expectations that AI-related products will account for over 50% of the business in the coming year. Tencent (00700), meanwhile, saw its first-quarter advertising revenue accelerate to 20% due to upgraded AI recommendation models, seen by the market as having found a commercial AI pathway. Notably, Alibaba and Tencent are financially robust, with net cash/reserves of 266 billion and 146.9 billion RMB respectively, providing ample “ammunition” for AI investments.

The performance of these “two giants” reveals that the entire mainland AI ecosystem is thriving. While not necessarily leading globally in innovative technology, their vast application scenarios and user bases are gradually exploring popular business models. Their stock prices, however, are significantly lagging. As shown in the attached [chart], the MSCI Global Technology Index, which includes major tech companies from various countries, surged 42.89% over the past year, while Tencent and Alibaba fell 11.21% and rose slightly by 1.84%, respectively, leading to substantial valuation disparities.

Tencent and Alibaba currently have forecasted P/E ratios of only 12.72 and 17.94, compared to the MSCI World Tech Index’s 27.16, offering at least a 30% discount. Considering the potential of the mainland market, Chinese tech stocks, including the “two giants,” are likely to attract investor interest and may even benefit from the overvaluation of Japan and South Korea.

The US-China leaders’ summit gathers major tech giants, with market expectations that the US will relax chip restrictions. Chinese capital is already prepared to take over the AI rotation. Concept stocks like MiniMax (00100) and Zhipu (02513) continue to be hotly traded. Thanks to valuation advantages, Hong Kong stocks may become the focus for Asian tech companies to catch up.

Hong Kong Economic Journal Investment Research Department

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